Mint – Blain’s Morning Porridge September
Any way one chose to relieve them of their riches, short of violence, was sporting.
If you want a happy story in the global capital markets, perhaps it’s Glencore. Earlier this year the market had written them off – the stock was in freefall, the bonds were 50% headliners in the distressed market. Now the stock is up 182%, and the bonds have recovered to close on par. Yesterday, they launched a new €1bn seven-year bond at 1.95% which was six times oversubscribed.
What changed? They did the right things. Glencore still arouses suspicion – especially re its inventory - but it aggressively slashed the dividend and sold assets to raise cash to pay down its crippling debt, the factor that underlay the market’s dire assessment of its prospects. It has cut net debt from US$23.6bn to near $16.5 bn. It’s aggressively selling mining assets as it restructures Xstrata.
Of course, let’s be honest that yesterday’s bond bingette in the name also benefitted from the European Central Bank. Bond buyers will coat-tail Europe’s central bank’s corporate bond buying programme and are prepared to buy anything with that critical Triple B rating! (Glencore is rated Baa3/BBB-, but my traders say it’s a cheap name to its peers.)
Yesterday’s deal was a refinancing of maturing debt – next year it has company loans and over $4bn of debt to repay – meaning it’s a name worth following and forming an opinion on as new supply is inevitable. According to Bloomberg, the average maturity of its $31.3bn of debt is 4.5 years.
What are the prospects going forward? Should the market take the new debt deal as a signal of its sustainability? One analyst I spoke to this morning thought the debt deal could jump start its stock price on the basis it’s a continuation of its aggressive debt management while it has repositioned itself well for a global commodities recovery – which, if you believe the growth signals and the Federal Reserve’s likely series of interest rate hikes, could kick in next year.
(On the other hand, the recent US economic numbers, including a slew of soft data in recent days like car sales hint at slowing activity. Does that mean the September meeting is about as “live” as the famous Monty Python Norwegian Blue? Is it just a summer thang, or are we headed into a proper US slowdown that will stymie global growth? There is a sense the globe is hanging on what happens in the US!)
Or do you take the view Glencore is still smoke and mirrors – that the key global commodities to worry-link with the name, including coal, copper and zinc, are still troubled? I read recently that the upside in these markets is mainly due to Glencore having cut capacity! Think about that – the reason the stock is up might be due to the company cutting its earnings to boost the price of its assets…confused...you will be. And bear in mind it’s the largest zinc producer, it has cut production, and zinc prospects are apparently rising. Go figure.
Whatever, apparently Glencore were only looking for €750m, but the €5.8bn book caused them to hike the size. “A prudent decision to refinance upcoming maturities at competitive levels,” said the company. Glencore is an ongoing story – and well worth keeping an eye on.
Meanwhile...great story this morning saying Mario Draghi at the ECB will be blaming Brexit for the current European economic blues when he pours out his heart/mumble swerves at the bank’s meeting tomorrow. As the great and good (and otherwise) of Europe’s bankers search for excuses to explain why there is “no clear upward trend” in inflation despite all their efforts…they will blame the Brits for voting the wrong way.
It’s apparently nothing to do with Europe’s economies using the wrong currency, being unable to kick start activity because of German debt intransigence, and being under the iron heel of the euro. It's all the fault of we Brits, triggering a new debt, banking and political crisis.
Excellent. Well done us.
Bill Blain
Head of Capital Markets / Alternative Assets
Mint Partners
