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Glencore Debt Shows Merger Will Reduce Rates: Corporate Finance

February 09, 2012

Feb. 6 (Bloomberg) -- Glencore International Plc debt investors are betting that an $88 billion merger with miner Xstrata Plc would lead to lower borrowing costs.

Glencore credit-default swaps have fallen more than any other European contracts this past month, beating Italian banks UniCredit SpA and Unione di Banche Italiane SCPA. The cost of insuring debt of the world’s largest listed commodity trader plunged 53 percent to 217 basis points since Jan. 3, with the rally accelerating last week, according to CMA prices.

Investors are gaining confidence that an all-share merger, which would give Glencore coal, copper and nickel mines from Africa to Asia, will mean the trader’s BBB rating at Standard & Poor’s will rise to meet Xstrata’s BBB+ grade. The yield on Glencore’s 1.25 billion euros ($1.6 billion) of 5.25 percent 2017 bonds fell 0.5 percentage point since the talks were announced on Feb. 2. to a record 3.83 percent, BNP Paribas SA prices show.

“Given the synergies between the companies and the sheer scale, it’s got to be a positive for the combined credit,” said Patrick McCullagh, the head of European credit research at Schroder Investment Management Ltd. in London, which oversees $63 billion of bonds. “When you match them together, it’s something of a juggernaut, and that’s got to be respected by the rating agencies.”

Swap Gap

The gap between credit-default swaps on Glencore and Xstrata narrowed to an eight-month low of 51 basis points, from 211 at the start of the year, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Simon Buerk, a spokesman for Baar, Switzerland-based Glencore, and Alison Flynn, a spokeswoman for Xstrata in London, declined to comment.

Glencore trades commodities such as coal and oil and owns mines, factories and warehouses. The company, which changed its name after management bought out former U.S. fugitive Marc Rich in 1994, undertook a $10 billion initial public offering in May.

It already holds a 34 percent stake in Xstrata. Combining them would form a company valued at about 56 billion pounds ($88 billion) and re-unite two groups that were separated a decade ago when Xstrata, the biggest exporter of coal burned by power stations, acquired Glencore mining assets.

Glencore may have to offer as many as three of its shares for each one in Xstrata. It has until March 1 to make a formal bid.

Glencore fell 18.5 pence, or 3.8 percent, to 464.1 pence at 2:03 p.m. in London trading. That’s the biggest drop since Nov. 21. The company’s shares climbed to the highest in more than six months at the end of last week.

Trading Closer

Glencore’s bonds are trading closer to those of similarly rated peers since the merger talks were announced. The yield on its 2017 note shrank to within 306 basis points of benchmark government bonds, from 619 on Oct. 4, Bloomberg Bond Trader prices show. That compares with the average 237 basis-point spread for notes in Bank of America Merrill Lynch’s EMU Corporates, Industrials, BBB Rated Index, which includes Glencore securities.

“Glencore bonds are coming in on the idea they could move from being a commodities player to being a mining entity,” said Michael Ridley, an energy and utilities credit analyst at Mizuho International Plc in London. “Glencore plus Xstrata has lower business risk than Glencore on its own.”

Glencore has $9.2 billion of bonds denominated in dollars, euros, pounds and Swiss francs outstanding, including $1 billion due in 2013, according to data compiled by Bloomberg.

Net Debt

Net debt fell to $8.3 billion as of June 30, from $14.8 billion at the end of 2010, Glencore said Aug. 25. It had net debt of 1.12 times adjusted earnings before interest, taxes, depreciation and amortization in June, down from 2.38 times a year earlier.

A merger would create a “mining and trading powerhouse” that would be credit-positive for both companies, particularly Glencore, Moody’s Investors Service said in a report today. “Xstrata currently has less debt and is more cash-generative than Glencore because mining is a higher-margin business than trading,” according to the report.

Glencore credit-default swaps declined 37 percent last week on reports of the merger. That compares with a 13 percent drop in contracts tied to Xstrata’s debt, CMA prices show.

Independent debt-research firm CreditSights Inc. estimated in a Feb. 3 report that the combined company would have sales of $200 billion, cash flow of $17 billion and net debt of $20.2 billion, if the transaction was financed with stock.

‘Healthy Credit’

“Given the significant funding needs” of Glencore’s “trading business, the combined company will likely look to keep a healthy credit profile, which reduces the risk of dropping into high yield over the long-term” CreditSights analysts said in the report.

While the credit rating implied by Glencore’s default swaps is improving, it’s still below the trader’s actual grade. The implied rating was Ba2 on Feb. 1, the last date for which Moody’s Analytics has data, up from Ba3 on Jan. 13.

Junk, or speculative-grade, companies are rated below Baa3 by Moody’s and BBB- by S&P. Glencore has never lost its investment-grade status at either ratings company.

“Glencore, which is the weaker-rated company of the two, is now tightening versus Xstrata,” said Maureen Schuller, a credit strategist at ING Groep NV in Amsterdam. “The market has started pricing in that the credit ratings between the two companies will converge.”

--With assistance Jesse Riseborough and Abigail Moses in London. Editors: Andrew Reierson, Paul Armstrong

To contact the reporter on this story: Ben Martin in London at

To contact the editor responsible for this story: Paul Armstrong at

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