Glencore halts trading ahead of plan to cut US$30b debt

[MELBOURNE] Glencore, the world's largest publicly traded commodity supplier, halted its stock in Hong Kong Monday ahead of an announcement on plans to cut net debt of about US$30 billion.

Baar, Switzerland-based Glencore, which last week posted its biggest weekly decline in London trading since going public in 2011, could consider options including a suspension of dividends and the sale of assets or shares to reduce its debt pile, according to National Australia Bank Ltd.

Glencore has lost more than half its market value this year, and along with BHP Billiton and Rio Tinto Group has seen profits slump as commodity prices plunged and touched a 16-year low last month. Standard & Poor's cut Glencore's outlook to negative from stable last week, saying weaker growth in China will weigh on copper and aluminum prices.

The commodities producer and trader is rated at BBB, the second-lowest investment grade, by S&P and Glencore is probably seeking to avoid any downgrade to BBB-, said Michael Bush, head of credit research at National Australia. Glencore relies on credit to finance commodity deals, meaning costs could increase if its rating were cut.

The rout in both commodity prices and miners' shares means several options available to Glencore to reduce its debt are currently unattractive, Bush said by phone from Melbourne. "A plan to reduce gearing in the current environment is going to be something of an exercise in value destruction." Glencore slumped 6 per cent in London on Friday to close at 123.15 pence, and declined 1.2 per cent in Hong Kong to HK$15.52.

Headed by billionaire chief executive officer Ivan Glasenberg, the company needs to cut net debt by almost half to US$16 billion by the end of next year to retain its credit rating, which may lead to the sacrifice of 2016 dividends, said JPMorgan Chase & Co analysts. Glencore's net debt was US$29.6 billion as of June 30, according to an Aug 19 filing.

The cost of insuring Glencore's debt with credit default swaps has more than quadrupled over the past year to 445 basis points as of the end of last week, the highest level since January 2012, CMA data show.

The yield premium over the swap rate on Glencore's September 2019 Australian dollar bonds climbed to a record 262 basis points last week, having been issued at a spread of 140 basis points a year ago, and was at 261 on Monday in Sydney, based on Australia & New Zealand Banking Group Ltd. pricing.

Glencore said Sept 3 it will buy back US$350 million of 7.5 per cent perpetual notes next month, trimming its debt-servicing costs as the company battles the commodity slump and the slowdown in China. Last month, the company capped 2016 capital investments at US$5 billion, down from an earlier forecast of US$6.6 billion.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.

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