Photographer: Valerian Mazataud/Bloomberg

Glencore Credit Alarm Is Easing After Deeper Debt Target

  • CEO Glasenberg revised debt target to $18 billion last week
  • Moody's on Friday cut rating to lowest investment grade

Investors are signaling they’re more optimistic that Glencore Plc, which holds the most debt in the mining industry, will be able to retain its investment-grade credit rating.

The company pledged last week to cut borrowings by $12 billion by the end of next year, expanding on its previous target. Credit-default swaps insuring Glencore’s debt for five years fell in the three days through Thursday after reaching the highest since 2009.

Moody’s Investor Service cut its rating one notch to Baa3, the lowest investment grade, on Friday. Glencore shares were little changed after the ratings firm said the outlook was stable, the company is “proactively” managing its $30 billion debt load and that it should be able to keep its investment-grade rating.

“At spot prices, I think that they will be able to stay investment-grade with the measures they announced,” said Max Mihm, a portfolio manager at Union Investment, which holds Glencore bonds among assets totaling about $271 billion. “If commodity prices continue to fall, they again have to do more. But from the investor call, I understand that they are ready to do so.”

Glasenberg’s Approach

Where once there was skepticism, analysts and investors are now more optimistic that Chief Executive Officer Ivan Glasenberg’s aggressive approach to the protecting the company’s balance sheet will help it weather the worst commodities rout since the global financial crisis in 2008. JPMorgan Chase & Co. this week upgraded the Swiss commodity trader and miner to outperform on the strength of the revised plan.

Glasenberg, a former accountant turned coal trader, used an investor call last week to reassure shareholders the balance sheet can withstand a slump in metals that’s forced the top miners to restructure businesses and led most, including Glencore, to scrap dividends.

With copper prices below what Standard & Poor’s uses to asses Glencore’s BBB rating, the second-lowest investment grade, the CEO also pledged to scale back operations, reduce costs and sell more assets. JPMorgan expects the company to exceed its asset sale target of $3 billion to $4 billion.

Glencore has already completed $8.7 billion of its revised $13 billion plan to cut borrowings. A company spokesman declined to comment.

Moody’s said it views the revised plan as “credible” and sees further improvement in Glencore’s key debt-to-earnings leverage metrics in 2016.

A gauge of six main metals has plunged 27 percent this year and the wider Bloomberg Commodity Index is near a 16-year low, eroding profits for the largest producers. Raw materials have slid as China’s slowdown curbed demand after years of heavy investment in new production. Glencore stock plunged 29 percent in a single day in September on concern about its debt load.

The shares advanced as much as 3.4 percent on Friday, before paring gains to trade little changed at 80.94 pence by 1:13 p.m. in London. The stock is down 73 percent this year.

Before the revised plan, JPMorgan analyst Dominic O’Kane estimated Glencore had a $15 billion shortfall in its balance sheet that it needed to plug to retain its current rating next year. He now forecasts the shortfall is less than $1 billion.

“After revising our estimates, we believe that Glencore’s credit metrics now fall comfortably within S&P’s BBB band on spot prices, without the need for any additional debt reduction or cost-saving measures,” Alon Olsha, an analyst at Macquarie Group Ltd. in London, said in a Dec. 11 note.

The mining company is currently rated two notches above junk at S&P. Glencore has said it wants to increase its credit rating by one level to BBB+. Credit-default swaps insuring Glencore debt for five years have fallen to 820 basis points, according to S&P Capital IQ’s CMA.

Glencore’s 1.25 billion euros of 1.25 percent bonds maturing in March 2021 were at 72.6 cents on Friday, according to data compiled by Bloomberg. Its 1.25 billion euros of 5.25 percent notes due in March 2017 were at 97.8 cents after a third consecutive day of gains.

Glencore shares rallied as much as 14 percent on Dec. 10, the day the debt plan was announced. The company said it’s able to remain “comfortably” free-cash flow positive, even if commodity prices decline further. It has more than $2 billion of free cash flow at current levels and predicted earnings before interest, tax, depreciation and amortization of $7.7 billion for next year.

Based on that guidance, Glencore would generate more free cash flow than any other major miner next year, Macquarie’s Olsha said. The company’s trading division provides the bulk of the contribution, given it doesn’t need to invest as much capital as the mining business, he said.

Debt Plan

The new debt program benefits investors because it reduces the prospect of Glencore needing to raise funding through another share sale that dilutes holdings, O’Kane said. The company, which sold $10 billion of shares in an initial public offering in 2011, also sold $2.5 billion of new stock in September to help pay down debt.

“Investors in general do think Glencore will retain its investment-grade rating,” said Saida Eggerstedt, a money manager who helps oversee about 29 billion euros of corporate bonds at Deka Investment GmbH in Frankfurt. “They have trusted Glencore over the years with its last-minute balance sheet fixes and their eye for being savvy in their investments.”

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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