Dec 11 -
Summary analysis -- Glencore International PLC -------------------- 11-Dec-2012
CREDIT RATING: BBB/Stable/A-2 Country: United Kingdom
Primary SIC: Nonmetallic
Credit Rating History:
Local currency Foreign currency
29-Nov-2012 BBB/A-2 BBB/A-2
Standard & Poor’s Ratings Services’ ratings on Glencore International PLC and Glencore International AG, together the Glencore group, reflect the credit quality of the U.K.-listed and Switzerland-based commodities trading group prior to its merger with Swiss mining group Xstrata PLC (BBB+/Negative/A-2). 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. In addition, both Xstrata and Glencore International AG will be core subsidiaries of Glencore International PLC. We therefore expect to equalize their ratings with the parent once the merger is completed.
Following shareholder approval and European Commission clearance of the transaction, we estimate that the probability of the deal going through is high and expect it to close in the first half of 2013. The main outstanding conditions are pending approvals from the Chinese and South African competition authorities.
The ratings on the Glencore group reflect Standard & Poor’s Ratings Services’ view of its “satisfactory” business risk profile and “intermediate” financial risk profile, as our criteria define the terms.
The business risk profile is supported by Glencore’s global commodity trading activities, industrial and mining assets, and nonconsolidated investments, notably its 34% stake in Xstrata, which it is currently in the process of merging with. Glencore’s profile is further supported by its fairly resilient trading operating performance. Constraints include trading-related risks including volatile working capital, the cyclical nature of mining activities, and country risks.
Glencore’s financial risk profile has weakened, in our view, following a number of small and midsized acquisitions, notably that of grain handler Viterra Inc. (BBB-/Watch Dev/--), and we expect that credit ratios will be at the lower part of the 20%-25% range we see as commensurate with our ‘BBB’ rating. The financial risk profile is supported, however, by our expectation of improved ratios in 2013 as the group reduces investments and generates positive discretionary cash flow. Other supportive factors include the group’s good risk management track record, good access to financial markets, as demonstrated by $2.9 billion in bond placements this year, and renewal and increase of its core revolving and borrowing base facilities.
S&P base-case operating scenario
We currently expect that in the second half of 2012 the group’s adjusted EBITDA will be slightly above the $2.4 billion generated in the first half. We also factor in a moderate increase in 2013. This should be supported by growing volumes in mining and oil operations, the resilient performance of the marketing segment, and the contribution from the Viterra acquisition.
S&P base-case cash flow and capital-structure scenario
Under our base-case scenario and including the pending Viterra acquisition, we expect the ratio of funds from operations (FFO) to debt to be about 20% in 2012--at the lower end of the 20%-25% range we view as in line with our ‘BBB’ rating.
We believe, however, that Glencore should be able to generate positive free operating cash flow (FOCF) and start reducing its debt and leverage in 2013 as its capital expenditure (capex) goes down.
We consider Glencore International PLC’s liquidity to be “adequate.” We estimate that the ratio of sources to uses of liquidity is above 1.2x for the next 12 months.
Key sources of liquidity on Sept. 30, 2012 included:
-- $9.7 billion under committed medium-term credit facilities maturing in May 2015 and June 2014; and
-- FFO that we expect to comfortably cover capex and dividends.
Key uses of liquidity may include:
-- Short-term debt maturities of about $4.1 billion in the next 12 months; and
-- A $3.5 billion cash outflow related to the pending Viterra acquisition.
We don’t include $5 billion of short-term maturities under the asset-backed credit lines in our estimate of uses of liquidity as these are offset by hedged inventories that amounted to $13.4 billion as of June 30, 2012.
Glencore is exposed to potentially significant cash margin and working capital swings, reflecting changes in commodity prices. However, the group has good bank relationships and could also provide more security to raise additional financing if necessary. Glencore protects itself against cash swings by having a policy of maintaining a minimum liquidity buffer of cash and undrawn committed lines of at least $3.0 billion at all times.
Glencore had comfortable covenant headroom on June 30, 2012, and we expect this to continue, especially as covenants are balance sheet based and do not include more cyclical EBITDA. Maintenance financial covenants in Glencore’s key bank facility relate to a minimum current ratio of 1.1x, a maximum ratio of long-term debt to tangible net worth of 1.2x, and a minimum level of net working capital of $750 million. There are no rating triggers.
We also consider the liquidity of the combined group to be adequate. We estimate that the ratio of sources to uses of liquidity is comfortably above 1.2x for the next 12 months.
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 and are rated ‘BBB’, the same level as the corporate credit rating. The degree of structural and contractual subordination within the group is moderate, in our view. When resolving the CreditWatch on the issue ratings we will analyze the position of debt issues in the new group structure and the level of structural subordination. We don’t expect contractual subordination to increase in the combined company as Xstrata has limited secured debt.
The stable outlook on Glencore International PLC reflects our view that we will assign a ‘BBB’ rating to the combined company, of which Glencore International PLC will be the ultimate parent. It also reflects our expectation that the combined company 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 EBITDA benefits from additional production. For 2012-2013 the ratings do, however, 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.
We might lower the rating on the combined company if commodity prices weakened below our price assumptions or in case of a sizeable acquisition, such that our adjusted FFO-to-debt ratio declined to 20% in 2013 and 25% in 2014 without near-term prospects of recovery and depending on management actions.
Rating upside is possible over the medium-term if free cash flow increases significantly in 2014 and the company is committed to reducing debt so that the adjusted FFO-to-debt ratio remains comfortably above 35% under our price assumptions.
Related Criteria And Research
-- Various Rating Actions On Commodities Trader Glencore And Miner Xstrata After Shareholder, EC Approval Of Merger, published on Nov. 29, 2012
-- Industry Report Card: EMEA Steelmakers Struggle With Faltering Demand, While Miners May Need To Cut Spending, Sept. 5, 2012
-- 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