Xstrata's long-term senior unsecured rating withdrawn; Viterra's CAD200 million notes rated Baa3
London, 07 May 2013 -- Moody's Investors Service has today affirmed the Baa2 ratings on
the outstanding notes of the various subsidiaries of Glencore Xstrata
Plc (formerly Glencore International Plc, or 'Glencore'),
with the exception of Viterra's CAD 200 milion of 6.4%
senior unsecured notes due 2021 which will be rated Baa3. Concurrently,
Moody's has withdrawn Xstrata Plc's (Xstrata) long-term
senior unsecured Issuer rating. The outlook on all the ratings
is stable.
"The Baa2 ratings reflect our view that the new group will benefit
from its substantial scale and the marketing and mining core businesses
of the group will be supported by the high-quality assets and pipelines
of projects brought to the well diversified combined group by both companies.
The affirmation of the Baa2 ratings on the outstanding bonds also assumes
that management will promptly put in place a cross-guarantee structure
to allow all the notes to rank on a pari-passu basis. The
only notes which will not benefit from the cross-guarantee structure
will be Viterra's CAD 200 million notes due 2021, which will
hence be rated Baa3," says Gianmarco Migliavacca, a
Moody's Vice President - Senior Analyst and lead analyst
for Glencore Xstrata Plc.
A full list of ratings affected by this announcement is provided towards
the end of this press release.
RATINGS RATIONALE
The affirmation of the Baa2 ratings is in line with the Baa2 ratings of
Glencore International AG and Xstrata, which Moody's confirmed
on 23 November 2012, and follows the successful closing of the acquisition
of Xstrata by Glencore International Plc (renamed Glencore Xstrata Plc
following the closing) on 2 May 2013, as the rating agency expected.
The withdrawal of Xstrata's senior unsecured issuer rating reflects
the fact that the mining company has become a 100% subsidiary of
Glencore Xstrata Plc, its shares have been delisted from the London
Stock Exchange, and it is envisaged will no longer provide standalone
audited financial accounts. Moody's expects that in the future
the only reporting entity will be Glencore Xstrata Plc ('Glencore
Xstrata'), whose shares are listed on the London Stock Exchange
and Hong Kong Stock Exchange.
Moody's expects Glencore Xstrata to benefit from its substantial
scale. The new entity's marketing and mining core businesses
will be supported by the high-quality assets and pipelines of projects
that Glencore and Xstrata will contribute to the new enlarged group.
Furthermore, Moody's positively notes that the substantial
diversification of the group by geography, commodity (metals,
oil, coal and agricultural) and type of business (mining and marketing)
would represent an important mitigating factor against the risk of ongoing
weakness in metal prices and a protracted downturn in Europe.
Moody's anticipates that Glencore Xstrata will have better credit
metrics than Glencore on its own, owing to Xstrata's higher
EBITDA, operating cash flows and lower debt levels. However,
Moody's anticipates that Glencore Xstrata's free cash flows
will be negative over the next 12-18 months, given the large
capital expenditure (capex) plan of the combined group.
Moody's will monitor Glencore Xstrata's future financial policy,
given that this needs to be tested in practice, as Glencore Xstrata
establishes a track record as a new and much larger group with new ambitions
and a stronger commitment to return surplus cash to shareholders than
previously anticipated by the rating agency. Moody's is aware
that Glencore Xstrata has publicly committed to maintaining an investment-grade
rating, but the rating agency needs to monitor in future whether
the much larger size of the combined group will lead to a more aggressive
financial policy, particularly in terms of approach towards M&A
and dividend policy. Moody's notes that Glencore employed
an aggressive financial policy in 2012, having completed several
debt-funded acquisitions - including that of Viterra -
that have contributed to increase its financial leverage and weaken its
full-year credit metrics on a standalone basis.
STRUCTURAL CONSIDERATIONS
Moody's has affirmed the ratings of all the outstanding senior unsecured
notes of Glencore and Xstrata at Baa2, based on management's indication
that a cross-guarantee structure aligning the positions of Xstrata's
and Glencore's existing - and future - bondholders
will be implemented in due course following the closing of the merger.
In particular, Moody's affirmation of the outstanding senior
unsecured notes assumes that Glencore Xstrata will put in place a structure
providing adequate protection to unsecured debt providers. Specifically,
this will ensure that all these obligations rank pari passu, with
existing rated external debt providers to the Glencore group receiving
a guarantee from the most relevant Xstrata holding company (Xstrata Schweiz
AG, which is already a guarantor for most of Xstrata's outstanding
senior unsecured notes) and, similarly, existing rated external
debt providers to the Xstrata group receiving a guarantee from the most
important companies within Glencore group (Glencore International AG and
Glencore Xstrata plc, which are already the guarantors of Glencore's
existing senior unsecured notes). Moody's considers as negligible
the impact of removing going forward the guarantees previously provided
by Xstrata Finance (Canada) Ltd, Xstrata Finance (Dubai) Limited,
Xstrata Canada Financial Corporation and Xstrata Plc to Xstrata's
outstanding senior unsecured notes, because these are holding companies
-- in most cases only financial purpose vehicles -- and therefore
the value of their guarantees is not meaningful compared to the value
of the guarantee provided by Xstrata (Schweiz) AG.
Moody's anticipates that the only notes that will not be guaranteed
by Glencore Xstrata will be Viterra's CAD200 million of 6.406%
senior unsecured notes due 2021. Based on this assumption,
the Baa3 senior unsecured rating assigned to these notes remains unchanged
(please see Moody's press release dated 20 December 2012).
LIQUIDITY
Following the closing of the merger with Xstrata, Moody's
expects the liquidity position of the combined group to be good.
This is despite the large cash outflows involved in executing the combined
group's capex plan, the working capital needs of the expanding
marketing business, scheduled debt repayments, and dividend
payments. In particular, the combined group had a combined
pro-forma cash balance of nearly $4.5 billion as
of 31 December 2012. It also has access to substantial committed
undrawn credit facilities, namely Xstrata's almost entirely
undrawn revolving credit facility of $6 billion (which will remain
in place immediately after the merger, as the lenders have already
waived the change-of-control mandatory prepayment clause),
and Glencore's two revolving credit facilities totalling $12.8
billion, under which $6.9 billion was available as
of FY 2012.
Furthermore, none of the change-of-control clauses
within the existing Xstrata bonds will be triggered as a result of the
merger, given that in Xstrata's bond indentures the change
of control must also be accompanied by a rating downgrade to sub-investment
grade in order to trigger a mandatory repayment. The only debt
that required mandatory repayment as a consequence of the merger was the
$2.7 billion bank loan drawn by Glencore and secured by
a pledge on the shares of Xstrata owned by Glencore prior to the merger.
Moody's anticipates that Glencore Xstrata's liquidity comfortably
covers this repayment. The rating agency notes that the liquidity
of the combined group could be strengthened further by disposals of non-core
assets, namely the expected sale of some of Viterra's business
lines that are unrelated to its grain-handling core business.
Furthermore, Moody's anticipates that Glencore Xstrata's
potential disposal of the Las Bambas copper development project,
as required by the Chinese Ministry of Commerce (MofCom) as a key condition
for its approval of the merger, will generate substantial cash proceeds
as early as 2014.
OUTLOOK
The stable outlook on Glencore Xstrata's rating assumes a smooth
post-merger integration process. Furthermore, the
outlook assumes that the combined entity will maintain good liquidity
at all times, thereby enabling it to comfortably execute its large
pipeline of capex, even in the event of modest delays or cost overruns.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's does not currently envisage any immediate positive pressure
being exerted on the ratings of Glencore Xstrata, given the uncertainty
surrounding (1) the post-merger integration process, whose
priorities, major execution milestones and key targets -
such as synergies - need to be clearly indicated, while Moody's
also notes that there have been several changes in the composition of
the senior management team, which will drive the future developments
of the group; and (2) the future strategy and financial policy,
which need to be tested in practice, as the new enlarged group establishes
its track record. However, positive rating pressure could
build over time as Glencore Xstrata establishes a track record as a successful
combined entity, achieving targeted synergies and further improving
credit metrics, with (1) a combined leverage ratio (Moody's-adjusted
gross debt/EBITDA) trending towards 2.5x; (2) (cash flow from
operations (CFO)-dividends)/gross debt in the mid-twenties
in percentage terms on a sustained basis; and (3) free cash flow
turning positive.
Conversely, downwards pressure could be exerted on Glencore's
rating if the merger with Xstrata results in unexpected outcomes such
as (1) severe disruptions during the integration process leading to severe
operational and financial underperformance; (2) a more aggressive
financial policy, leading to new large debt-funded acquisitions
and to a weaker liquidity profile; and/or (3) a material deterioration
in credit metrics, with a combined leverage ratio (Moody's-adjusted
gross debt/EBITDA) above 3.5x, a (CFO after dividends)/gross
debt below the high teens in percentage terms, and free cash flow
turning negative on average through the cycle.
AFFECTED RATINGS
Glencore International AG: Senior Unsecured Issuer ratings of Baa2
affirmed
Glencore Finance (Europe) S.A.: Senior unsecured ratings
of Baa2/(P)Baa2 affirmed
Glencore Funding LLC: Senior unsecured ratings of Baa2 affirmed;
P-2 short-term rating affirmed
Xstrata Plc
Senior unsecured Issuer rating of Baa2 withdrawn
Xstrata Canada Corporation: Senior unsecured rating of Baa2
Xstrata Finance (Canada) Limited: Senior unsecured rating of Baa2/(P)Baa2
affirmed; P-2 short-term rating affirmed
Xstrata Finance (Dubai) Limited: Senior unsecured rating of Baa2/(P)Baa2
is affirmed; P-2 short-term rating affirmed
Xstrata Canada Financial Corporation: Senior unsecured rating of
Baa2/(P)Baa2 affirmed
Viterra Inc
Viterra's US$400 million 5.950% Global notes
due 8/01/2020 ratings of Baa2 affirmed
Viterra's CAD200 million 6.406% Canada notes due 2/16/2021
ratings of Baa3 affirmed
The principal methodology used in these ratings was the Global Mining
Industry published in May 2009. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
Glencore Xstrata is a leading publicly listed diversified natural resources
group that combines Glencore and Xstrata's large and well-diversified
portfolios of assets and mining projects. The activities of the
group are organised around three main business groups: Metals &
Minerals, Energy Products and Agricultural Products, which
are in turn sub-divided into several commodity departments.
These departments are responsible for managing the production, sourcing,
hedging, logistics and marketing activities relating to their respective
commodities. The largest departments, through which the group
commands global market-leading positions, span all key base
metals (copper, zinc, nickel, aluminium), thermal
and metallurgical coal, oil as well as main agricultural commodities
such as grains, oilseeds, cotton and sugar. In 2012,
the pro-forma unaudited revenues of the combined Glencore Xstrata
group were $233 billion.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Gianmarco Migliavacca
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's affirms Baa2 ratings on the notes of Glencore Xstrata Plc; stable outlook
