There has been plenty of speculation over the past few months that Anglo-Swiss commodities giant Glencore PLC could lose its investment-grade credit rating. Currently, the debt-laden company is two notches above junk status.
Many investors are alarmed about a potential downgrade to junk, given that it would increase funding costs and the company is already struggling to manage its current debt load of nearly US$30 billion. But RBC Capital Markets analyst Tyler Broda is less concerned than some of his peers.
He said a downgrade to junk status remains possible, but he doesn’t see it as a “cataclysmic” event and thinks it would be manageable in the short term.
“Although medium-term funding costs would rise, in the absence of significant deterioration in commodity prices, our analysis does not foresee immediate challenges to Glencore’s funding,” he said in a note.
Broda noted the rating agencies are likely to give Glencore time to complete its proposed asset divestment program before slapping it with downgrades. As well, the company has US$12.5 billion of liquidity, which should allow it to avoid refinancing pressure until at least 2017, he said.
That is not to say Glencore is out of the woods. The company is highly sensitive to commodity prices, which continue to weaken. Broda believes that at “sustained” copper prices below US$2.30 a pound, the value of Glencore’s equity does not offset the debt. Copper is currently at US$2.04 a pound.
He initiated coverage of the stock with a sector perform rating and a target price of 100 pence a share, slightly above the current price of 93.5 pence.
“Although we see the potential for commodity prices to continue to come under pressure, we expect that the market will continue to price in longer-term optionality with Glencore,” Broda said.