The call follows the most tumultuous day in Glencore’s five-year spell on public markets as the FTSE 100 company sank a staggering 29 per cent. The fall followed a note from Investec which said the shares could be worthless.
For the record, it is understood that there are no share price triggers for any of that debt and that Glencore debt covenants are based on net debt rather than the gross number.
How does Glencore CEO Ivan Glasenberg get out of this?
In recent weeks, the company’s chief executive Ivan Glasenberg has sought to alleviate billions of dollars of debt by selling shares and assets and shelving dividends.
These numbers alone make any new bid by Glencore fanciful, but they do raise the possibility that Glencore itself is vulnerable.
Goldman Sachs Group said last week that should commodity prices fall another 5%, the metrics needed to maintain Glencore’s credit rating would be out of the required range. While Glencore shares fell nearly 30 percent yesterday, Citigroup called the stock attractive because it’s cheap and the company doesn’t have a stressed balance sheet.
We believe that in the event the equity market continues to express its unwillingness to value the business fairly, the company management should take the company private, whereby restructuring measures can be taken easily and quickly, with a potential float of just the industrial business occurring further down the track.
And shares are more likely to go up than down. Standard Poor’s has reduced its outlook on Glencore’s BBB level to negative, saying China’s slowing economy will continue to weigh on copper and aluminum prices, which are near six-year lows.
However, one point worth noting is that numerous mega-deals are done when markets are at or near the peak, and company executives are under pressure to be seen to be building assets to take advantage of high prices.
“We expect commodity markets to remain subdued for several years to come given that excess supply has coincided with a slowdown in demand, ” the firm said.
The risk is that a few subsidiaries within the trading business are already in default of the terms of their lending and that this could cascade through the business, triggering at best a serious credit squeeze and, at worst, a collapse that would leave Glencore in the hands of its bond holders.
Clyde Russell is a columnist for Reuters.