Glencore Credit-Line Concerns Are `Overblown,' Macquarie Says

What's Driving Glencore Stock Higher After Record Losses?
  • Macquarie sees little risk to miner's $15 billion credit lines
  • Glencore statement allays investors' fears about liquidity

Glencore Plc bonds jumped after the commodity trader reassured investors about its financial stability and Macquarie Group Ltd. called credit-line concerns “overblown.”

The miner’s March 2021 notes surged the most since their sale earlier this year, aided by a company statement on Tuesday that addressed concerns about liquidity. Macquarie also said banks were unlikely to pull $15 billion of syndicated loans because there are no triggers linked to credit ratings and “very little naked exposure” due to Glencore posting 100 percent collateral for every trade. 

“Fears of credit lines being withdrawn are overblown,” London-based analysts Alon Olsha and Daniel Sepe wrote in a research note dated Sept. 29. It will only happen if “Glencore’s counterparty risk increases substantially.”

The commodity trader reiterated plans to cut debt by as much as $10.2 billion in its statement, and highlighted a lack of debt covenants and “long-term relationships” with lenders. The statement followed a rout on Monday, when some of the company’s bonds fell to junk-level prices and its stock plunged 29 percent amid concerns about the debtload and tumbling commodity prices.

“Yesterday’s announcement buys the company time, but it’s a relatively short leash and it needs to make progress on disposals.” said Mark Wade, the London-based head of industrials research at Rogge Global Partners Plc, which manages more than $50 billion. “There are a lot of wounds from the last two days so the pressure is on Glencore to enact on its plan in the very short term.”

Syndicated Loans

The commodity trader this year raised $15.25 billion of syndicated loans from a group of 60 banks, including a $8.45 billion one-year loan, according to a May 28 statement. The company pays annual interest of 40 basis points to 45 basis points above the dollar London interbank offered rate on funds drawn under the facilities. It had drawn $6.6 billion at the end of June, according to the latest financial report.

“The liquidity position is very much supported by this short-term credit line,” said Max Mihm, a portfolio manager at Union Investment, which holds Glencore bonds among its about 250 billion euros ($280 billion) of assets. “And in a situation like this, it’s good to have such an instrument.”

Commodity-trading companies often rely on bank lines with large groups of lenders that can be repeatedly drawn and repaid to finance the purchase and delivery of metal, energy and agricultural assets.

Credit Lines

Glencore’s revolving credit due next year includes a term-out option, allowing it to be converted into a one-year loan, as well as a one-year extension option, the company said May 28. The other credit line matures in 2020 and includes two one-year extension options. 

The company has $11.4 billion of “current borrowings” including capital market notes and U.S. commercial paper, according to the financial report. It has about $6 billion of bonds due by the end of 2016, data compiled by Bloomberg show.

Glencore’s lenders have good insight into the company and will probably maintain ties, said Union Investment’s Mihm. There will only be a risk if the banks “lose trust in the viability of the business model,” he said. 

Banco Bilbao Vizcaya Argentaria SA, HSBC Holdings Plc, Lloyds Banking Group Plc and Rabobank Group helped syndicate this year’s deal.

‘Financially Robust’

The Swiss company said on Tuesday that it’s “financially robust” and faces no solvency issues. It also announced plans this month to cut its $30 billion of net debt, including selling assets, issuing new shares and scrapping dividends. The company’s finances have been hit by commodity prices trading near the lowest since 1999, according to a Bloomberg index.

The commodity trader’s 1.25 billion euros of bonds due March 2021 climbed seven cents on the euro to 77 cents, according to data compiled by Bloomberg. They tumbled to a record low 69 cents on Monday. The 750 million euros of March 2025 notes rose seven cents to 73 cents.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.

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