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London - Glencore [JSE:GLN], the world’s largest listed commodity supplier, may take further steps to alleviate the strain of a $31bn debt pile and protect its credit rating amid a rout in prices.
After trimming this year’s spending plan as much as $800m and selling $290m of mines, the company may announce additional measures to shore up its balance sheet alongside earnings on August 19, according to Citigroup and Barclays.
The company needs to cut net debt by almost half to $16bn by the end of next year to retain its credit rating, which may lead to the sacrifice of 2016 dividends, said JPMorgan Chase analysts.
Commodity companies’ earnings worldwide are under pressure because of 13-year-low prices, while industry wide dollar-bond borrowing costs have jumped to the highest in five years. Glencore is rated BBB at Standard & Poor’s, the second-lowest investment grade.
“If Glencore doesn’t do anything to reduce leverage, the ratings will be at risk,” said Max Mihm, a portfolio manager at Union Investment, which holds Glencore bonds among it’s about $280bn of assets. “They are dependent on bank financing, so they have to do something.”
A spokesperson for Baar, Switzerland-based Glencore declined to comment on potential measures.
Investors are demanding an average 4.95% to hold dollar bonds sold by highly rated mining, metal and steel companies, the highest since June 2010, Bank of America Merrill Lynch data show. For junk-rated metals and mining firms, the average yield is 13.6%, the highest since March 2009.
About 54% of Glencore’s outstanding bonds are denominated in dollars, according to data compiled by Bloomberg.
Debt Levels
Glencore’s net debt to earnings before interest, tax, depreciation and amortization is estimated at 3.4 times, using spot commodity prices and foreign-exchange levels, Morgan Stanley analysts led by Menno Sanderse said in an August 4 note. That compares with Glencore’s target of less than 3 times.
The company could lower the dividend, raise equity, reduce operating costs, boost production, cut spending or sell assets, the analysts wrote.
It may cut a further $500m to $1bn from future spending plans, said Barclays analyst David Butler. Reductions covering 2016 and 2017 may be announced with results, the bank said in a note.
Stock Slump
Glencore is the worst performer on the FTSE 100 Index this year, plunging 42% amid the commodities rout. It is 67% below the price in its $10bn initial public offering four years ago.
The company had $31bn of net borrowings and $53bn of gross debt at the end of last year, according to its annual report. Net debt was 2.4 times adjusted earnings.
The trader raised a one-year $8.5bn revolving credit facility from a group of banks in May that it can extend for another 12 months through a so-called term-out option, according to data compiled by Bloomberg. It has $6.3bn of bonds maturing by the end of 2016, the data show.
The cost of insuring Glencore’s debt against default rose to 307 basis points on August 12, the highest since July 2013, according to data provider CMA. The credit-default swaps were at 297 basis points on Thursday, the data show.
Miner CDS
Contracts protecting other miners’ debt are also at multi- year highs. Swaps on Rio Tinto Group reached a more than two- year-high of 130 basis points on Thursday, while swaps on BHP Billiton [JSE:BHP]. hit a three-year high of 104 basis points, the data show. Bonds sold by Noble Group, Asia’s biggest commodity trader, are at three-year lows.
“There’s a very good reason to be worried” about Glencore’s balance sheet, said Richard Knights, a mining analyst at Liberum Capital. If commodity prices deteriorate further the company “could be looking at ratings downgrades, cutting dividends or, further down the line, even potential rights issues.”
