TEXT-S&P: various actions on Glencore, Xstrata on merger approval
Overview -- The shareholders of Glencore International PLC and Xstrata PLC have approved the merger of the two companies, and we expect it to be finalized in the next few months. -- We see the credit quality of the future combined group and of Glencore International PLC, its ultimate holding company, as in line with our 'BBB' rating, reflecting the group's strong business risk profile and significant financial risk profile. -- We are assigning our 'BBB/A-2' ratings to Glencore International PLC, and affirming the ratings on Glencore International AG at 'BBB/A-2'. The outlook is stable. -- We are placing our BBB+/A-2' ratings on Xstrata PLC on CreditWatch negative, indicating that we expect to downgrade the company by one notch once the merger is finalized. Rating Action On Nov. 29, 2012, Standard & Poor's Ratings Services assigned its 'BBB/A-2' long- and short-term corporate credit ratings to global mining and marketing company Glencore International PLC--the ultimate holding company of the Glencore group--which is set to merge with Xstrata PLC. The outlook is stable. At the same time we affirmed our 'BBB/A-2' long- and short-term corporate credit ratings on Glencore International AG--Glencore International PLC's subsidiary and the Glencore group's intermediate holding company. The outlook is stable. We also affirmed the 'BBB' ratings on the instruments issued and guaranteed by Glencore International AG and Glencore International PLC. We placed our 'BBB+' long-term corporate credit ratings on Xstrata and its subsidiary Xstrata Canada Corp. on CreditWatch with negative implications, indicating that we expect to downgrade the companies by one notch to 'BBB' once the merger is finalized. We also put the ratings on the bonds issued or guaranteed by Xstrata on CreditWatch negative. Rationale The ratings on Glencore International PLC and Glencore International AG reflect the credit quality of the Glencore group before the merger with Xstrata. They also reflect our expectation that, after the merger, the combined group, of which Glencore International PLC will be the ultimate holding company, will also have our 'BBB' rating. Both Xstrata and Glencore International AG will be core subsidiaries of Glencore International PLC, and we therefore expect to equalize their ratings with the parent once the merger is completed. Following last week's shareholder approval of the merger between Glencore International PLC and Xstrata PLC, and its clearance by the European Commission, we estimate that the probability of the deal going through is high and expect it to close in the next few months. Approvals from the Chinese and South African competition authorities are still pending. The rating of the combined Glencore Xstrata group will reflect our view of its business risk profile as "strong" and its financial risk profile as "significant." We estimate that EBITDA for the combined group will be $13 billion-$14 billion in 2012, while its Standard & Poor's-adjusted debt should be close to $40 billion after the closure of the Viterra acquisition. The business risk profile is supported by the group's above-average diversity provided by the large scale global mining business, that accounts for about 80% of EBITDA, and noncyclical commodity trading activities with resilient operating performance that account for 20% of EBITDA. It also reflects leading global and good cost positions in copper, thermal coal, zinc and lead, and nickel, and strong production growth in the mining segment and oil production in 2012-2013. Offsetting these strengths are exposure to the volatile mining industry, country risks despite good geographic diversification, and trading-related risks. The group's financial risk profile is constrained by substantial debt, which we expect to rise sharply in 2012 and keep increasing in 2013 because of the ambitious capital expenditure program and a number of already-contracted acquisitions such as Viterra in an environment of weakening commodity prices. As a result, we expect negative discretionary cash flow in 2012 and in 2013. We factor into the rating that under our commodity price assumptions the fully adjusted funds from operations (FFO)-to-debt ratio for the combined company will be in the 25%-30% range in 2012 and 2013 including the acquisition of Viterra. The group's financial risk profile is supported by its well-spread maturity profile and our expectation that it should have good free operating cash flow (FOCF)-generation potential from 2014, when most of its ongoing projects are commissioned. We also factor in some management flexibility in rationalizing the combined company's capex. Liquidity We consider the liquidity of the combined group to be "adequate." We estimate that the ratio of sources to uses is comfortably above 1.2x for the next 12 months. Key sources of liquidity on Sept. 30, 2012, included: -- Surplus cash of about $1 billion; -- Availability of $12.5 billion under committed medium-term credit facilities at Xstrata and Glencore level; -- FFO that we expect to cover capex and dividends over the next 12 months, assuming the company could reduce its capital spending below what we assumed under our base-case scenario; and -- $7.5 billion of bonds issued by Xstrata and Glencore in October-November 2012. Key uses of liquidity may include: -- Short-term debt maturities of about $9 billion in the next 12 months, including the $2.7 billion facility secured with Xstrata shares at Glencore level. We understand that part of the short-term debt has already been repaid with the above-mentioned bond placements; and -- A $3.5 billion cash outflow related to the pending Viterra acquisition. We don't include in our estimate of uses of liquidity $5 billion of short-term maturities under Glencore's asset-backed credit lines, as these are trading related and offset in our analysis by hedged inventories that amounted to $13.4 billion as of June 30, 2012. Recovery analysis Xstrata's bank loans and bonds are issued by wholly owned finance subsidiaries Xstrata Finance (Canada) Ltd., Xstrata Canada Financial Corp., and Xstrata Finance (Dubai) Ltd., and are all guaranteed by Xstrata and rated 'BBB+/Watch Neg' in line with the corporate credit rating on the parent. In addition, the bonds issued by these three subsidiaries are cross-guaranteed by each other and by the holding company Xstrata (Schweiz) AG. Xstrata has also guaranteed the remaining public bonds of Xstrata Canada Corp., whose ratings we equalize with those on Xstrata. The Glencore group's main borrowers are the intermediate holding company and key operating company Glencore International AG and the wholly owned, indirectly held finance subsidiaries Glencore Finance (Europe) S.A. and Glencore Funding LLC, which altogether account for most of the group's consolidated debt. Senior unsecured bonds that the finance subsidiaries issue are guaranteed by Glencore International AG and Glencore International PLC, which will become the ultimate holding company of the combined group. We currently factor into the rating that cross guarantees will be put in place between the two parts of the group, or that another mechanism will be put in place in order to limit the structural subordination that may otherwise arise. We therefore currently expect that the overall level of structural and contractual subordination for bondholders in the combined group will be moderate and that bonds will continue to be rated in line with the corporate credit rating of the combined group. CreditWatch/Outlook The stable outlook on Glencore International PLC And Glencore International AG, and the CreditWatch negative on Xstrata reflect our view that we will assign a 'BBB' rating to the combined group, of which Glencore International PLC will be the ultimate parent. They also reflect our expectation that the combined group should be able to achieve neutral to positive FOCF and an adjusted FFO-to-debt ratio of about 30% by 2014, when its capex program passes its peak and its EBITDA benefits from additional production. For 2012-2013 the ratings factor in that the FFO-to-debt ratio could be closer to 25%. If the merger doesn't go through, which is unlikely in our view, we would affirm the rating on Glencore. If that happened we might still lower our ratings on Xstrata to 'BBB' from 'BBB+', because Xstrata's stand-alone credit metrics for 2013 are likely to fall significantly below the previously indicated level of 40%, in our view, as debt has increased substantially as a result of higher capex. We might lower the rating on the combined group if commodity prices fell below our price assumptions, or in case of a sizable acquisition that pushed our adjusted FFO-to-debt ratio below 20% in 2013 or 25% in 2014 without near-term prospects of recovery, and depending on management actions. We might consider a positive rating action on the combined group over the medium term, if free cash flow turned very positive in 2014 and the group was committed to reducing debt, so that its adjusted FFO-to-debt ratio remained comfortably above 35% under our price assumptions. Related Criteria And Research -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- Key Credit Factors: Methodology And Assumptions On Risks In The Mining Industry, June 23, 2009 -- Industry Report Card: EMEA Steelmakers Struggle With Faltering Demand, While Miners May Need To Cut Spending, Sept. 6, 2012 Ratings List Ratings Affirmed Glencore Funding LLC Commercial Paper(4) A-2 Ratings Affirmed; CreditWatch/Outlook Action To From Glencore International AG Corporate Credit Rating BBB/Stable/A-2 BBB/Watch Pos/A-2 Glencore International AG Senior Unsecured BBB BBB/Watch Pos Glencore Finance (Europe) S.A. Senior Unsecured* BBB BBB/Watch Pos Glencore Funding LLC Senior Unsecured* BBB BBB/Watch Pos Glencore Singapore Pte Ltd. Senior Unsecured(4) BBB BBB/Watch Pos *Guaranteed by both Glencore and Glencore International AG. (4)Guaranteed by Glencore International AG. New Ratings Glencore International PLC BBB/Stable/A-2 CreditWatch/Outlook Action Xstrata PLC Corporate Credit Rating BBB+/Watch Neg/A-1 BBB+/Negative/A-2 Xstrata Canada Corp. Corporate Credit Rating BBB+/Watch Neg/A-1 BBB+/Negative/A-2 NB. This list does not include all ratings affected. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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