Glencore CDS Costs Soar On Poor Results -- Update
20 Agosto 2015 - 2:37PM
Dow Jones News
By Christopher Whittall and Laurence Fletcher
The price investors must pay to insure against a default on
Glencore PLC's debt ballooned after poor results from the
commodities giant.
As of Thursday, investors had to pay $330,000 to insure against
$10 million of Glencore debt for five years using credit default
swaps, or CDS, according to data group Markit. That is more than
three times the price of insuring against a default last September.
At the end of last week, it cost $294,000.
The Swiss mining firm reported a sharp half-year loss on
Wednesday amid a slump in commodity prices and a slowdown in the
Chinese economy. Prices for copper and oil, two of Glencore's
earnings drivers, are trading at or near six-year lows.
Andrey Kuznetsov, a credit analyst at Hermes Investment
Management, which oversees GBP30 billion ($47 billion) in assets,
said the main takeaway from Glencore's earnings call was that the
company was caught off guard by the slowdown in China.
"They are involved in metals and trading, so you would expect
them to have a better understanding of what's happening in China.
China has a big influence on all commodities," Mr. Kuznetsov said.
"Investors in metals and mining companies are paying particular
attention to what's happening in China."
Glencore shares tumbled almost 10% Wednesday but recovered a bit
to trade 2.5% higher on Thursday at 162.85 pence in London. Shares
in mining companies on the Stoxx Europe 600 are down 22% over the
past three months, while energy stocks are down 14%.
Glencore Chief Financial Officer Steve Kalmin said on
Wednesday's earnings call that he will do whatever is within his
control to protect Glencore's investment grade credit rating. "Even
if we drop one notch, it isn't a high cost to the company," CEO
Ivan Glasenberg said on the call. A spokesman from Glencore
declined to comment Thursday.
Glencore aims to cut its net debt load to $27 billion by the end
of 2016 compared with $29.6 billion as of the end of June through
planned cost cuts, noncore asset sales and potentially paring back
some trading activity.
Meanwhile, bond investors are demanding a higher yield to
compensate them for the risks of holding Glencore debt. The yield
on 10-year Glencore bonds was trading at 5.9% Wednesday, Markit
said, up by a percentage point from early July. Yields rise as
prices fall.
Around $64 million of Glencore 10-year bonds changed hands
Wednesday, according to trading platform MarketAxess Holdings Inc.,
more than five times the daily average this year.
Zoso Davies, a credit strategist at Barclays PLC, said credit
default swaps on Glencore are quoted at more-distressed levels than
the non-investment-grade German industrial conglomerate
ThyssenKrupp AG, which is in the midst of restructuring its
business to focus on higher-value products and away from low-value
steel products.
Other miners, such as Anglo American PLC, have been grappling
with high debt levels. Investors had to pay around $308,000 to
insure against $10 million of Anglo debt for five years using
credit default swaps on Thursday, up 5% from the end of last week,
according to Markit.
One investor that has profited from Glencore's woes is Lansdowne
Partners, one of the world's biggest equity hedge funds, which has
raised its bet against the miner's shares over the past year. It
made a bet on 0.8% of Glencore's stock that shares would fall,
according to regulatory filings.
Lansdowne's flagship $10.7 billion Developed Markets fund has
its biggest bet on falling prices on the basic-materials sector,
according to its latest letter to investors, which was reviewed by
The Wall Street Journal. Two of the fund's top five bets on falling
stock prices are in the sector, according to the letter.
A spokesman for Lansdowne declined to comment.
Other funds betting against Glencore's shares include Davidson
Kempner European Partners LLP, Passport Capital LLC, and Sunrise
Partners Limited Partnership, according to regulatory filings.
However, while overall hedge-fund bets against Glencore have
risen since March, they are still slightly down from a year ago,
according to figures from Markit.
Alex MacDonald contributed to this article
Write to Christopher Whittall at christopher.whittall@wsj.com
and Laurence Fletcher at laurence.fletcher@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
August 20, 2015 13:22 ET (17:22 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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