[LONDON] Commodities trader Glencore's credit rating was downgraded to one notch above junk status by Moody's Investors Service on Friday which cited likely weak mining market conditions over the next two years.
Moody's downgraded Glencore's ratings by one notch to Baa3 from Baa2 and said the outlook was stable. "Our decision ...reflects our expectations that the pricing environment in mining will remain unfavourable in 2016-17, making a return to the previous level of earnings unlikely," Moody's lead analyst of Glencore Elena Nadtotchi said in a statement. "However, we believe that Glencore has the capacity to adjust its balance sheet to a reduced earnings level in order to maintain its investment grade ratings."
Switzerland-based Glencore this year has come under pressure from investors and ratings agencies to cut its net debt of around US$30 billion, one of the highest in the industry, as prices for commodities such as copper and coal hit multi-year lows.
In September Glencore announced it would take several measures to cut net debt, including asset sales, reduced expenditure, a suspension of dividend payments and raising US$2.5 billion of new equity capital.
It said last week it was targeting net debt of US$18 billion to US$19 billion by the end of 2016, lowering a previous target of US$20 billion. "The stable outlook on the Baa3 ratings factors the expectation that Glencore will improve its leverage profile in 2016 and will continue to maintain strong liquidity," Moody's said.
It added that any big moves in commodity prices, copper prices in particular, would have an impact on the ratings.
The ratings agency also said an upgrade of Glencore's ratings to Baa2 would be considered in the medium term once leverage was sustainably reduced.