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Glencore’s deeper debt cuts spur credit optimism

London - Glencore’s aggressive approach to shrinking the industry’s biggest debt pile is fuelling optimism the trader and miner can retain its investment-grade credit rating amid the worst commodities rout in seven years.

To head off concern that an existing $10bn debt- reduction plan wasn’t cutting deep enough, the company last week said it’s targeting net debt of as low as $18bn by the end of 2016, down from $30bn in June. Credit-default swaps insuring Glencore’s debt for five years fell the past three days.

Chief Executive Officer Ivan Glasenberg used an investor call 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 [JSE:GLN], to scrap dividends. With copper prices below what Standard & Poor’s uses to assess Glencore’s BBB rating, the second-lowest investment grade, the CEO also pledged to scale back operations, reduce costs and sell more assets.

“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 $271bn. “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.”

The company has already completed $8.7bn of its revised $13bn plan to cut borrowings. A Glencore spokesperson declined to comment.

A gauge of six main metals has plunged 27% 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 shares in Hong Kong lost as much as 6.5% on Friday.

Before the revised plan, JPMorgan Chase & Co analyst Dominic O’Kane estimated Glencore had a $15bn 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 $1bn and has upgraded his rating on the stock to overweight.

“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 in London, said in a December 11 note.

The mining company, whose stock is down 73% in London this year, 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 805 basis points, according to S&P Capital IQ’s CMA.

Glencore’s €1.25bn euros of 1.25% bonds maturing in March 2021 rose for the third day on Thursday, gaining about 1 cent on the euro to 73 cents, according to data compiled by Bloomberg. Its €1.25bn of 5.25 % notes due in March 2017 also posted a third consecutive day of gains.

Glencore stock

Glencore shares rallied as much as 14% on December 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 $2bn of free cash flow at current levels and predicted earnings before interest, tax, depreciation and amortization of $7.7bn 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.

Investors benefit

The new debt programme 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 $10bn of shares in an initial public offering in 2011, also sold $2.5bn 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 chairperson of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.

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