The one catalyst many Glencore bears have been eagerly waiting for, is the downgrade of the troubled independent energy trader to junk status, a catalyst which as previously explained, will likely spring various, heretofore unknown margin calls and collateral “waterfalls” a la AIG.
Overnight, one of the two rating agencies, Standard and Poors, came one step closer to that fateful moment when it downgraded Glencore, however it decided to throw the company one last lifeline by keeping it at the very lowest investment grade rating, and instead of cutting it from BBB to single B or CCC where its CDS and bond yield implies the company should be trading, it kept it a BBB-.
This is what it said:
Glencore PLC Ratings Lowered To ‘BBB-/A-3’ On Price And Sector Review; Outlook Stable
Standard & Poor’s Ratings Services today said it has lowered its long- and short-term corporate credit ratings on global diversified mining and trading company Glencore PLC to ‘BBB-/A-3’ from ‘BBB/A-2’. The outlook is stable.
We also lowered the rating on the debt issued or guaranteed by Glencore and Glencore International AG to ‘BBB-‘ from ‘BBB’.
The downgrade reflects both our view of the material challenges the mining industry faces, with increased uncertainty about future operating performance in 2016 and 2017, as well as our assessment that Glencore’s 2015 financial profile was below our earlier expectations with funds from operations (FFO) to debt closer to 20%, notwithstanding material debt reduction. This compares to a range of 23%-28% which we previously saw as commensurate with the ‘BBB’ rating. The rating action follows a modest negative re-evaluation of both business and financial factors for Glencore, as reflected in our negative comparative rating assessments. We believe the ‘BBB-‘ rating has more sustainable headroom, particularly in the prevailing low price environment, and we anticipate significant further debt reduction in 2016.
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