Citi says Glencore is both solvent and liquid

1st Oct 2015 13:11

(ShareCast News) - Investors´ worries that Glencore´s need for financial liquidity might drive it towards the brink of bankruptcy - or worse - were wide of the mark, one of the world´s largest brokers said.In the past financial crisis, when companies´ financing became too reliant on short-term debt or wildly exagerrated asset prices, all too often that is exactly what happened.Many corporate treasurers found themselves suddenly forced to sell assets to raise emergency financing, for example, and many companies simply did not survive.Another common trigger of balance-sheet stress was when short-term financing from banks had been taken for granted.For analysts at Citi, both those worries were overblown in the case of Glencore. The outfit remained both solvent and liquid.Indeed, they estimated it would not need to approach debt markets until 2017 and therefore current market pricing of its risk of default - a measure of financial stress - remained a "theoretical number", they said in a research note sent to clients on Thursday.The commodities trader run by Ivan Glasenberg had over $12bn of total liqudity at its disposal at the time the report was written, including $6.5bn in unrestricted cash sitting in its bank accounts.Its bond maturities until end 2016, on the other hand, were about $6.5bn - so the company was "well-covered" the broker said.Citi also pointed out how in the short-term an $8.45bn tranche of $15.25bn in revolving credit facilities (RCF) had the option to be extended for an additional 12 months from May 2016. Significantly, " there are no credit ratings-related triggers and no material adverse change (MAC) clauses," Citi said.Hence, the firm would not need to approach debt markets until at least 2017.However, might the banks tighten the terms on those RCF´s? The broker believed that was more applicable to distressed cases.Likewise, other investors´ concerns that $4.3bn in [uncomitted] 'other bank loans' might be pulled were misplaced, Citi added."There's no precedent of any such event back in 2008/09," Citi explained.Furthermore, the syndicate of banks behind Glencore was sixty-strong and "have been dealing with the company for decades and presumably have good understanding of the business."Lastly, contrary to some market watchers Citi expected the drop in commodity prices to 'release' significant working capital - a key determinant of a firm´s liquidity - and there was margin for an upside surprise from the sale of its agriculture marketing business.As of 13:02 shares in Glencore were 2.23% lower to 89.51p.Citi had a ´buy´recommendation and 170p target on the stock.Company´s debt stabilisesOn Thursday, the inverted pricing in Glencore´s credit default swaps unwound, a possible signal of lessened near-term fears of insolvency.One-year CDS for the miner dropped to 60 basis points below five-year swaps, according to data from S&P Capital IQ's CMA cited by Bloomberg.One-year CDS cost 679 basis points and five-year swaps cost 739 basis points as of 18:10 BST.The company´s March 2025 debt was little changed at 72 cents on the euro as of Thursday´s close.On Wednesday, its May 2016 senior unsecured debt was trading at 97 cents on the dollar after having dipped below 90 cents in the previous session.