Glencore maintains earnings, boosts liquidity

LONDON, Nov 12 (Reuters) - Swiss commodities firm Glencore International AG kept its earnings steady despite weak commodity prices, and increased its available cash and credit lines in the third quarter, credit analysts said. The commodities trader and metals producer on Wednesday brought forward its third-quarter earnings report and hosted a conference call with investors to help counter market concerns about its liquidity, which have driven its credit default swap spreads as high as 1,222 basis points, according to Markit data. Glencore had more than $3.5 billion in cash and untapped committed credit lines at end-October, up from about $3.1 billion at end-June, said Henri Alexaline, a senior credit analyst with BNP Paribas. The group has raised its strategic minimum liquidity to $3 billion from $2 billion previously, HSBC credit analysts wrote in a note to investors. "On the liquidity front they are sending a strong signal in the current market environment that their funding policy is conservative," Alexaline said. The company, which is known for being secretive, released the figures only to banks and investors and declined to comment. Deutsche Bank analysts said the results for the quarter to end-September were strong. "Key features included almost flat EBITDA (earnings before interest, tax, depreciation and amortisation) to the prior year despite the weakening of commodity prices, a significant working capital unwind that drove much improved liquidity, a solid level of underlying free cash flow," they wrote in a note to investors. EBITDA slipped 1 percent to $1.9 billion as higher volumes and realised prices for coal offset soft metals prices, they said. Free cash flow was $1.6 billion and was applied to debt reduction. NO NASTY SURPRISES "Overall these results are OK and contain no nasty surprises, and although we still think Glencore spreads are too wide, we cannot see much in these results to dramatically improve sentiment around the name," analysts at Royal Bank of Scotland wrote. Five-year credit default swaps on Glencore debt were 18 basis points wider at 1,147.5 basis points on Wednesday, amid a generally wider market, according to Markit data. For weeks, the Swiss firm has had the widest spread levels of the 125 companies on the investment-grade Europe index. The improvement in liquidity came largely from a $1.3 billion release of working capital in the quarter, RBS analysts wrote. The current environment of declining metals volumes and prices means Glencore requires less working capital, Alexaline said. Working capital was still a negative $1.4 billion for the nine months, but another improvement in the fourth quarter is likely to leave the figure flat for the year, he said. There is likely to be more pressure on EBITDA in the fourth quarter as the economic slowdown affects the prices of metal and energy products, Alexaline said. "The top line is coming down, but its operating costs are also easing in industrial activities." As for short-term debt, Glencore does not access the stressed commercial paper market but instead securitises its receivables, Alexaline said. "We don't foresee any reason that the banks would look to cancel the ongoing receivable securitisation programmes" when they roll over in mid-2009, he said. The employee-owned company reduced its short-term debt to $6.2 billion from $11.4 billion in the quarter, repaying significant amounts under its syndicated rolling credit facility and bank loans secured by Xstrata shares, HSBC analysts wrote. Glencore, which has a 35 percent stake in the mining group, had reduced the amount outstanding under bank facilities secured by Xstrata stock to $2.85 billion at end-September, then repaid another $500 million in October and $450 million in November, Deutsche analysts wrote. "The October repayment was expected, but the November repayment is incremental in our view. We estimate that around $2.5 to $3 billion of Glencore's stake in Xstrata is unencumbered, adding to potential liquidity," they added. While the CDS market shows that the company's cost of funding has increased, Glencore has no major maturities and little need to refinance for the next 18 months, Alexaline said.