But even if that plan plays out as expected, Glencore will be left with a debt mountain of around $20 billion, which is above its market value – after Monday’s share price plunge, Glencore’s value stood at about $15 billion.
The slump follows a near 30 percent dive in its London-listed arm and comes as an economic crisis in China convulses global markets, with stocks, commodities and emerging market currencies tumbling.
Another prominent bear, Goldman Sachs, said last week in a note that Glencore had failed to do enough to reassure investors about cutting its debt pile. “Unless you think commodity prices are going close to zero, then this was overdone”.
Shares in commodities group Glencore bounced back Tuesday but still have a way to go to recoup losses from the previous day, when investors fretted over the company’s ability to service its sky-high debts at a time when many commodity prices are at multi-year lows. “That lack of information causes a huge amount of uncertainty at Glencore which is having a massive contagion effect across the world”, Wilson said prior to Glencore’s statement. Glencore declined to comment. So, when HBOS was in the mire in September 2008, its CDS price, known as a spread, shot up 200 basis points to 512, meaning it would have cost $512,000 to insure $10m of the crippled bank’s five-year debt.
In an unscheduled statement, Glencore said it had “no debt covenants and continues to retain strong lines of credit and secure access to funding”.
On Wednesday, Glencore said it has “taken proactive steps to position our company to withstand current commodity market conditions”, adding the company “remains operationally and financially robust” and has “positive cash flow, good liquidity and absolutely no solvency issues”.
Switzerland-based Glencore trades everything from wheat to oil to cobalt. It’s the world’s biggest exporter of power-station coal, with more than 30 mines in Australia, Colombia and South Africa and is among the top three agricultural exporters in Russian Federation, the European Union, Canada and Australia. Alcoa Inc, the biggest U.S. aluminum producer, said it would break itself into two companies amid a glut stemming from booming production.
In the first half, Glencore reported an adjusted net profit of $US882 million, down from $US2 billion a year earlier. The trading business reported earnings before interest and tax of $1.07 billion.
The company has a total debt-to-equity ratio of 104 per cent, more than double its rivals at Rio Tinto Group and BHP Billiton.
Copper, which is used in electronics and which Glencore is particularly exposed to, is trading near six-year lows.
The company has hired Citigroup and Credit Suisse Group to sell a minority stake in its agricultural business, a person familiar with the situation said Friday.
For now, it seems that the rush for the exit has stopped in Glencore, but it is too early to say that a bottom has been reached, especially with the week’s China data still to come.
Analysts at investment bank UBS also said that Glencore shares have been “heavily oversold”, although staff at Jefferies warned that the risks of investing in Glencore are “clearly very high”.