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Rating Action:

Moody's affirms Baa2 ratings on the notes of Glencore Xstrata Plc; stable outlook

07 May 2013

Xstrata's long-term senior unsecured rating withdrawn; Viterra's CAD200 million notes rated Baa3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 Concurrently, Moody's has withdrawn Xstrata Plc's (Xstrata) long-term senior unsecured Issuer rating.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 affirmed

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
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