By Art Patnaude
LONDON--Commodities giant Glencore International PLC (GLEN.LN)
Monday was selling new debt that will be especially attractive to
investors that see its merger with Xstrata (XTA.LN) being
delayed.
Glencore and Xstrata are in the midst of securing shareholder
and regulatory approval to create the world's fourth-largest
diversified miner with a market capitalization of about $70
billion.
Glencore was selling 200 million sterling ($320 million) worth
of bonds, increasing the size of a previous deal that matures in
April 2022 to a total of GBP500 million. The original bonds were
sold in March.
The debt becomes more expensive for Glencore if its merger with
Xstrata is not completed by April 3, 2013, when the first annual
interest payment comes due. In this scenario, the coupon of the
bonds would increase to 6% from 5.5%, according to a bank working
on the sale.
The new bonds have attracted around GBP350 million worth of
orders, according to a bank on the sale. The bonds will price at
300 basis points over the corresponding gilt.
The merger, which has gone through many twists and turns since
it was announced in February, still has to secure regulatory
approval from the European Union and from China. The European
Commission is expected to issue a preliminary verdict on Nov. 22,
while the timing of the Chinese regulatory approval remains
uncertain. Both Glencore and Xstrata shareholders are also due to
vote on the all-share merger Nov. 20.
Glencore's shares are currently trading at 2.87 shares to every
Xstrata share. Hedge fund traders say the discount in the current
spread to the share swap ratio offer is a reflection of uncertainty
regarding when the transaction will close rather than whether it
will close.
However, analysts and hedge fund traders still say the
probability of the deal closing is high after Glencore bumped its
offer to 3.05 Glencore shares for every Xstrata share in September,
up from an original 2.8 share swap ratio.
"We're quite confident that the merger does proceed," said Sam
Barker, investment analyst in London at ECM Asset Management.
Given the positive opinion, Barker said ECM is less inclined in
buying this Glencore bond, because of the language that increases
the coupon. This clause has meant that the deal offers only limited
spread pick-up to the existing bonds. Barker said he sees better
value in Glencore's bonds maturing in 2019. "We're more interested
in bonds that do not have the step-up language," he said.
Liberum Capital said in a note last week that, "We maintain our
view of 80% probability of deal success, and anticipate closure
late 2012, early 2013."
In a second coupon step-up clause, Glencore's bond would
increase to 6.75% if the company loses its investment-grade credit
rating. Moody's Investors Service rates Glencore Baa2, two notches
above junk, while Standard and Poor's Rating Services rates the
company three notches above junk at BBB+.
HSBC and Santander are lead managers on the deal.
Alex MacDonald contributed to this article
Write to Art Patnaude at art.patnaude@dowjones.com