S&P downgrades Glencore, which may buy-back some debt

RENO, NV -Standard & Poor's has lowered the short -and long-term credit ratings for Swiss commodity trader and mining group Glencore, citing a severe drop in prices and industrial assets values. S&P Credit Analysts Karl Nietvelt and Alex Herbert cut Glencore's ratings from ‘BBB/A-2' to ‘BBB-/A-3'. The outlook is stable. The rating action reflects: • Metal prices' unprecedented fall and weak near-term outlook • ‘The related significant drop in the value of Glencore's large industrial investments portfolio, which has resulted in weaker asset-debt coverage levels." The market value of Glencore's investments is now well below the book value of $13 billion at the end of September 2008. "The market value of Glencore's 35% stake in Xstrata has, for instance, shrunk to about $3.7 billion today from record levels of $22 at end-June 2008." • Reduced financial flexibility from its stakes in Xstrata, Century Aluminum, Ressnet, Rusal, etc. • Downward revision of Glencore's 2009-2010 EBITDA to $3 billion, compared to EBITDA of $5.5 billion in 2007. "Our conservative estimate takes into account metal prices at close to current levels, but also increases from some growth projects (notably Columbian coal) and continued strong (albeit lower) EBITDA from its marketing activities." At the same time, the analysts recognized several continuing credit strengths of Glencore including: • More resilient EBITDA and free cash flow at Glencore, compared to pure mining players, due to its commodity trading operations, working capital releases and an anticipated halving of mining-related capex. • Adequate and further increasing liquidity exceeding $3.5 billion consisting of cash and availability under Glencore's $9.1 million long-term syndicated bank line. "In addition, we expect several billion dollars of working capital releases in fourth-quarter 2008 and first-quarter 2009, as a result of the drop in commodity prices. • Anticipated debt reduction over 2009-2010 with financial debt expected to decline to "a still significant $15 billion-$16 billion" from $20.8 billion at the end of September 2008. "The ratings on Glencore reflect its diversified earnings base, provided by its position as the world's largest commodity trader, complemented by industrial production assets (principally metals and coal mining) and major nonconsolidated investments, including its 35% stake in Xstrata," the analysts said. However, they added, "The company's acquisitive history, significant debt, trading-related risks, and mining exposure to extremely volatile and cyclical commodity price and county risks offset those strengths. S&P views Glencore's current liquidity as "adequate and likely to strengthen further in fourth-quarter 2008 and first-quarter 2009 from major working capital releases as commodity prices have fallen." Nietvelt and Herbert said their stable outlook forecast for Glencore anticipates that the company "will manage the upcoming downturn, thanks to expected more resilient profits and free cash flow from its large trading activities, anticipated significant near-term debt reductions from working capital releases, and its adequate liquidity and debt repayment profile. We also expect Glencore's core banks to remain supportive." The Financial Times reported Tuesday that Glencore intends to buy back some of its bonds to boost confidence in the company after the cost of insuring its debt against default rose to high levels. "Glencore strongly believes its current credit spreads do not reflect its underlying credit portfolio and has, therefore, decided to utilize part of its strong liquidity position to selectively consider debt buyback opportunities," the company said in a statement. Source: mineweb