GLNCY Glencore Plc (PK)

By Alex MacDonald 

LONDON-- Glencore PLC told Barclays it isn't worried about the credit-downgrade fears that have rocked its share price, saying that it would pass any costs to its customers and that the move wouldn't affect the company's competitiveness, the bank said Thursday.

Glencore sent representatives to the bank's London offices as part of a broad offensive to halt a collapse in its share price, which dropped 29% on Monday and by nearly three-quarters on the year. The shares seesawed wildly Thursday as investors digested information the commodities giant was providing in such private meetings, rising more than 8% to an intraday high of 99.17 pence a share before falling into the red and closing down 0.58% at .9102 penny.

In a note Thursday, the bank said Glencore chiefs for corporate finance and strategy and communications dismissed concerns about the company's high debt levels. While it has almost $30 billion in net debt and as much as $18 billion in short-term credit used for trading. Glencore's credit lines have no debt covenants or credit-rating triggers that would force it to renegotiate with its group of more than 70 banks, the executives said, according to Barclays.

Even in the event of a credit downgrade, the current low-interest-rate environment means it would result in minimal costs that wouldn't necessarily affect the company's trading competitiveness.

Barclays called it an "encouraging meeting" that "helped to clear up many misconceptions and confusion we believe is currently in the market around commodity trading in general."

Not everyone believes things would still be sunny for Glencore if it suffered a credit-rating downgrade. Carole Ferguson, mining analyst at SP Angel said the company still faces risks in the event of a credit downgrade because trading costs could rise unexpectedly if markets turn.

"A lot of that depends on the stability of the market environment" for interest rates and commodity prices, she notes. "If it becomes unstable, people won't take [Glencore's] point of view."

The Barclays note opened a window onto the actions Glencore is taking to shore up investor confidence after Monday's collapse. Company officials, including Chief Executive Ivan Glasenberg, have been rushing to allay concerns about the company's debt-laden balance sheet, assuring investors that the company was taking steps to cut costs.

Chief among those measures is a $10 billion debt-reduction plan that suspends future dividend payments, issued new equity and put assets on the market to reduce net debt to around $20 billion by the end of 2016.

In a sign of confidence about the company's future, two separate U.K. regulatory filings showed Glencore Chairman Tony Hayward purchasing 100,000 shares for about $138,000 and board member John Mack, Morgan Stanley's former CEO, purchasing 550,000 shares for about $673,000 this week.

Despite an initially favorable reaction from investors to the debt-reduction plan, sentiment turned sour amid continued falls in raw-materials prices to which Glencore is exposed as a major producer of coal and base metals as well as one of the world's biggest commodities traders. More broadly, investors are increasingly worried about the scale of corporate debt world-wide as the outlook for earnings growth darkens.

Concerns centered on Glencore's capacity to safeguard its investment-grade credit rating unless it took greater measures to cut debt, amid falling commodity prices or prices that remain low for longer given the gloomy outlook for the economy in China, a major consumer of coal, copper and nickel, among other commodities. Macquarie Group mining analyst Alon Olsha said in a note this week that Glencore needs to announce an additional $4 billion in net debt reduction initiatives to safeguard its investment-grade credit rating from downgrade given the continued price rout over the past three weeks.

Losing investment-grade status would severely constrain Glencore's borrowing and its trading arm would have to curtail its activities significantly.

The stock-price plunge has highlighted problems investors see in Glencore's business model, which combines a massive trading division that buys and sells commodities with a mining arm that produces those materials. The combination was supposed to make Glencore less susceptible to commodity-price downturns, but the amount of borrowing needed to run a trading house has alarmed investors as the company's earnings and share price have fallen.

Prices for the main commodities that drive Glencore's revenue--copper, coal, zinc and nickel, among others--have all hit multiyear lows in recent months.

On Thursday the company confirmed more job cuts in South Africa amid floundering coal prices, the latest in a rash of mining job losses to hit the country. Glencore spokesman Gugulethu Maqetuka said 378 employees would be affected by the closure of its South Witbank mine, with 138 redistributed at other coal operations and the remaining 240 laid off. About 100 employees are expected to be affected as the company talks with labor unions about closing its Witcons coal-processing plant. Glencore also said it is still considering closing its Eland platinum mine in South Africa due to falling prices, putting more than 900 jobs at risk.

Meanwhile the cost of insuring $10 million of Glencore's debt against default over a five-year period rose after falling for two consecutive days. It is now about $716,250 annually compared to $680,000 on Wednesday, but still down from Monday when the price ballooned nearly 60% to $876,000, according to Markit data. The latest insurance cost is still very high historically, but shows that investor fears may be starting to ease.

Write to Alex MacDonald at alex.macdonald@wsj.com

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(END) Dow Jones Newswires

October 01, 2015 15:02 ET (19:02 GMT)

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