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Traders price Glencore bonds like junk


Posted on September 30, 2015

An illuminated logo sits on a sign outside Glencore Xstrata Plc's headquarters in Baar, Switzerland, on Thursday, Aug. 15, 2013. Glencore Xstrata, the mining company created in a $29 billion deal three months ago, said second-quarter copper output increased 22 percent after it boosted production from mines in Africa. Photographer: Gianluca Colla/Bloomberg©Bloomberg

Traders have started to quote prices for Glencore debt in a manner normally associated with lower-quality paper, commonly known as junk bonds.

The shift in pricing dynamics in the private over-the-counter markets this week came as shares in Glencore swung wildly as investors worry about the ability of the miner and trading house to manage its debt pile in a commodity downturn.

    The group retains an investment grade credit rating according to rating agencies and its $36bn of outstanding bonds have up to now been bought and sold on the basis of their yield, which moves inversely to price.

    But this week, dealers and investors say trading in the $36bn of bonds outstanding has moved to a cash basis, where prices are quoted in terms of cents on the dollar of face value. This form of pricing is generally used for junk bonds, which have a higher risk of default.

    Pressure on the company’s debt and equity has intensified as analysts debate the effect of falling raw materials prices and rising debt costs.

    One investment bank warned on Monday that the group’s equity might be worthless if commodity prices did not recover swiftly.

    The company said it retained “strong lines of credit and access to funding”.

    Unsecured senior Glencore debt maturing in May 2016 traded below 93 cents on the dollar on Tuesday, with some trades occurring below 90 cents, according to investors.

    A buyer of the debt should receive a 0.85 cent coupon in November, and a dollar of principal back in eight months’ time. The return available from doing so is equivalent to around a 13 per cent yield on an annual basis.

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    Prices for longer-term debt fell even further as investors began to assess the potential recovery values for Glencore debt, most of which is unsecured.

    “Everything beyond five years is trading around or below 70 cents on the dollar,” Zoso Davies, a credit strategist at Barclays, said.

    Prices for investment grade debt are normally quoted on the basis of prospective income, either in terms of the spread over and above that available from government debt, or in terms of the yield available.

    The yield on the Bloomberg European investment grade index is 1.35 per cent.

    Trading in corporate bonds tends to be more cumbersome and infrequent than the stock market, where Glencore shares worth $20bn were traded on Tuesday.

    Investors and dealers estimated the volume of Glencore bonds changing hands on the same day to be measured in the hundreds of millions of dollars, rather than billions.

    The company said: “Glencore has no debt covenants and continues to retain strong lines of credit and secure access to funding thanks to long-term relationships we have with the banks.

    “We remain focused on running efficient, low-cost and safe operations, and are confident the medium and long-term fundamentals of the commodities we produce and market remain strong into the future.”

    In addition to its bonds, Glencore has more than $35bn of loans outstanding.

    One investor pointed to the company’s more than 300 banking relationships, saying that the willingness of its bankers to continue extending credit lines to fund the trading business would determine the future of Glencore, and that so far, it appeared to retain their confidence.

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