Xstrata Credit-Default Swaps Diverge From Glencore After Merger

The cost of credit-default swaps insuring debt of Xstrata Plc is slumping amid speculation the contracts won’t cover new debt now that the mining company has completed its merger with Glencore International Plc.

Swaps on Xstrata dropped for 13 of the past 14 trading days, falling 16 basis points today to a more than three-year low of 107 basis points, according to data compiled by Bloomberg. Contracts on Glencore rose 12 basis point to 172, pushing the gap between them to the widest since November.

Glencore Xstrata Plc, which after the $29 billion merger is the world’s fourth-biggest mining company, is raising new revolving credit facilities to replace existing loan pacts. The Baar, Switzerland-based company has $51 billion of debt outstanding, Bloomberg data show.

The reasons behind the move in Xstrata swaps “include the unwinding of loan hedging as Xstrata loans get refinanced and future bond issuance gets done out of a Glencore entity, which will combine to leave Xstrata CDS less liquid,” said Suki Mann, a strategist at Societe Generale SA in London. “We do not expect Xstrata CDS to be orphaned given that deliverable obligations will remain in place post merger.”

Orphaned credit-default swaps are contracts without underlying securities. A basis point on a credit-default swap protecting 10 million euros ($13 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Best Performing

Swaps on Xstrata were the best performing among European metals and mining companies today, while Glencore’s were the worst, according to data compiled by Bloomberg.

Xstrata has also rallied more than any of its peers over the past three months, falling 30.5 percent in that period, followed by a 15 percent drop for Anglo American Plc and 10 percent for Glencore.

The combined company, which started trading in London on May 3, has a market value of about $73 billion and would have reported net income of $2.2 billion last year, based on pro-forma figures released that day. The stock gained 1.4 percent today to close at 355.05 pence.

The takeover of Xstrata was completed almost two years after Glencore’s $10 billion initial public offering that ended more than three decades of it operating as a closely held company.

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