Global Economics

World's Largest Commodities Trader Glencore Considers Going Public


Credit squeeze and tumbling commodities prices spur publicity-shy Swiss giant to consider initial public offering

(Bloomberg) — Glencore International AG, the world's largest commodity trader, is considering an initial public offering after the credit crisis and tumbling commodity prices threatened to curb its funding.

Glencore said yesterday it sold as much as $2.2 billion of bonds to investors including BlackRock Inc. and Government of Singapore Investment Corp. (GIC:SP). The bonds are convertible upon an IPO, the Baar, Switzerland-based trader said. An offering would end more than three decades of the company operating as a closely held partnership.

"Going back a decade they probably didn't consider it, but there was a wakeup call for them during the credit crisis," Henri Alexaline, a credit analyst at BNP Paribas SA in London, said by phone. "Now they realize they must diversify their funding methods to give themselves greater flexibility when those problems occur."

The firm, renamed Glencore after management bought former fugitive U.S. financier Marc Rich's interest in Marc Rich & Co. in 1994, trades metals and oil. As commodity prices slid in the second half of 2008, credit-default swaps on Glencore's 5-year bonds rose 10-fold, indicating investors believed there was increasing chance of default.

Marc Ocskay, a spokesman for Glencore, declined to comment.

Staff Payments

Glencore's credit rating was cut by Standard & Poor's to BBB-, the lowest investment grade, in December of last year. Profit in the first quarter fell 69 percent. Senior staff agreed to defer their first termination payment in the event of their departure until at least 2012, Glencore told bondholders in March, in an attempt to strengthen its finances.

The company, led by Chief Executive Officer Ivan Glasenberg, 52, improved disclosure by issuing increasingly detailed financial statements. Glencore published details of its earnings on its Web site for the first time this year. Net debt was $9.3 billion as of Sept. 30.

Selling the bonds "marks an important milestone as we embark on the next stage of our corporate development," it said in a statement. The bonds give Glencore a pre-conversion equity value of $35 billion, the company said.

"Glencore was never going to go from fully private to fully public in one step," BNP's Alexaline said. "This is an evolution in how they fund their business."

Chinese Investment

Other buyers of the bonds include Greenwich, Connecticut- based private equity investor First Reserve Corp. Zijin Mining Group Co., China's third-largest copper producer, will buy $200 million of the bonds, the company said in a filing today.

"An IPO would enhance the group's credibility and bring further transparency in reporting and governance matters," Miriam Hehir, an analyst at RBC Capital Markets in London, wrote in a note. RBC lifted its rating on Glencore's bonds to "outperform" from "sector perform."

As well as trading commodities, Glencore owns zinc mines in Peru and Kazakhstan, coal mines in South Africa, and smelts copper in the Philippines.

Assets also include a 34 percent stake in Swiss mining company Xstrata Plc, for which Glencore sells some production, and 9.7 percent of Moscow-based United Co. Rusal, the world's largest aluminum producer.

Glencore could hold an IPO in the second half of next year, and may plan to merge with Xstrata afterwards, said Subramaniam Varada, an analyst at broker Liberum Capital Ltd. in London.

Coal Buyback?

Another motive for selling the bonds is to fund Glencore's purchase of the Prodeco coal assets in Colombia, which were sold for $2 billion in March to Xstrata, Varada said. Glencore has an option to buy back the assets for $2.25 billion at any point up to the first anniversary of the completion of the deal.

Commodity prices have rebounded in 2009, with copper doubling and oil gaining 72 percent. Metals prices are forecast to rise again in 2010 as Chinese demand keeps growing.

"To come to the market like this shows they are confident in the fundamentals," Alexaline said.

To contact the reporter on this story: Brett Foley in London at bfoley8@bloomberg.net. Firat Kayakiran in London at fkayakiran@bloomberg.net.


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