A UK analyst from Investec wrote a report last week saying that if commodity prices stay where they currently are, all of Glencore’s cash flow would be needed to pay interest on its $71bn debt and the company could be worthless. Glencore shares promptly fell around 30% in one day, in turn causing a huge resource company sell-off around the globe. As an interesting aside, only 2 out of 23 analysts surveyed by Reuters had a “sell” or “underperform” rating on the stock. And while the stock has bounced off the low, it is still round 85% below where it listed in 2011.
Why should Australian fixed income investors be interested? Well, in September 2014 Glencore made its inaugural AUD bond issue, selling $500m of bonds at Swap + 140bps or around 4.85% at the time. The issue was hailed as a landmark as the number of international corporates issuing in the AUD market was quite small.
After the share price fall, the yield on Glencore bonds in the UK has rocketed to almost 15% with investors now pricing in the fact that Glencore’s debt will be downgraded to non-investment grade or ‘junk’ bond status. Glencore’s UK 5 year credit default swap price soared to 938bps according to Bloomberg. That’s the premium paid each year to insure against Glencore defaulting.
In Australia, the September 2019 bonds are trading between 7.00% and 7.50% (as at 29 Sep) up from around 4.3% in mid-August. The discrepancy in Glencore’s bond yields in Australia and the UK is high but might be explained by extremely volatile markets and Glencore’s more active debt trading in Europe where it is headquartered. Nonetheless, the company is under pressure from a relentless fall in commodity prices, a trading culture that is seen as a ‘black box’, a huge debt pile and a voracious market that is intent on punishing any company that falls foul of sentiment.