S&P bulletin on Glencore ratings

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Jan 2009

Standard & Poor's Rating Services said Friday that its ratings and outlook on Glencore (BBB-/Stable/A-3) were unchanged following the group's proposed sale of its Colombian coal operations to Xstrata PLC (BBB/Negative/A-3). Glencore will use the $2 billion in proceeds to fund its 35% share in Xstrata's proposed capital increase. We view the transaction as somewhat negative for Glencore's credit quality, but already factored it into our downgrade of the company on Dec. 16, 2008. Excluding the contribution from the Colombian coal operations, our conservative credit scenario for Glencore now assumes an average EBITDA estimate over 2009-2010 of about $2.6 billion (versus $3 billion assumed previously), the bulk of which will stem from Glencore's commodity trading activities. Glencore's 2009-2010 ratio of adjusted funds from operations to debt could therefore fall to just below 15% in our base case scenario. However, the sale should also lead to lower capital expenditures and our expected level of positive free cash flow in 2009 is unchanged. A positive element of the transaction is that the capital increase strengthens Xstrata's credit quality and may improve its valuation, which in turn would improve Glencore's financial flexibility and asset coverage. Finally, we have also assumed that Glencore will not exercise its repurchase option of the Colombian coal assets in 2010, unless its balance sheet or commodity markets have improved significantly by then.

Source: Reuters