Moody’s lifts Glencore rtgs by one notch to Baa2/P-2

Outlook on all ratings stable

LONDON, March 26: Moody’s Investors Service has upgraded longand short-term ratings on Glencore International AG (Glencore) and its related entities by one notch to Baa2/P-2. The outlook on all ratings is stable.

“The upgrade of ratings recognizes that Glencore has reduced debt, strengthened its leverage profile and re-set its financial framework in 2016. The company targets to maintain its improved credit position amid a range of price scenarios. In 2017/2018, Glencore should maintain its improved cost positions, benefit from higher commodity prices and deliver higher earnings and further improvement in leverage,” said Elena Nadtotchi, VicePresident Senior Credit Officer at Moody’s.

Ratings Rationale

The upgrade of Glencore’s ratings to Baa2 reflects the deleveraging of the company. In 2016, the company has reduced debt and adjusted leverage to 3.3x from about 4.4x in 2015. Accelerated cost reduction and sustained focus on free cash flow (FCF) generation, supported by the change in the dividend policy, have better positioned Glencore to withstand increased volatility in commodity markets and maintain its improved leverage profile amid a number of pricing scenarios. Taking into account reduction in debt in 2016, we now expect Glencore to maintain stronger leverage, with adjusted debt/EBITDA below 2.5x in 2017, supported by projected growth in EBITDA and strong FCF generation this year.

Taking into account Moody’s base-case commodity price assumptions for copper prices of $2.3/lb for 2017, rising to $2.4/lb for 2018, and $1/lb for zinc in both years, we expect Glencore’s EBITDA to improve to around

$11.5 billion this year from $8.7 billion in 2016. The main drivers behind this expected increase in EBITDA are the improved cost positions, as well as Moody’s modestly higher assumptions for copper prices for 2017, that remain below current spot price of $2.6/lb. Moody’s projection of EBITDA is based on the assumption of stable volumes across the industrial portfolio in 2016/2017. Copper, zinc and thermal coal prices remain the largest sensitivities for Glencore on the Industrial side.

Glencore’s substantial commodity Marketing franchise contributes strongly to its earnings and free cash flow generation and proved to be resilient in the environment of falling commodity prices. Taking into account Glencore’s guidance of $2.2-$2.5 billion of EBIT in 2017, Moody’s expects Marketing to contribute around 25% of EBITDA in 2017, as contribution from the Industrial business is set to rise. Moody’s considers Glencore’s Marketing operations to be a positive differentiating credit factor, contributing to lower volatility in earnings and counter-cyclical working capital movements, as well as the company’s ability to generate strong free cash flow (FCF) through periods of declining commodity prices.

The Baa2 rating and the stable outlook are underpinned by Moody’s expectation that Glencore will continue to generate strong FCF in the range of $2.5 -$3 billion in 2017/2018, after it has cut its adjusted capital expenditure (CAPEX) to about $3.2 billion in 2016 and assuming CAPEX at around $4 billion in 2017/2018. This also takes into account Glencore’s new dividend policy that makes payments proportionate to cash flow generation after CAPEX. Moody’s expects Glencore’s FCF to remain positive under a number of pricing scenarios (including under Moody’s stress case scenario, which includes copper price assumption at $2/lb).

We believe Glencore should be able to retain its financial flexibility and capacity to maintain its improving leverage profile amid lower metal prices.

In 2016, the company has substantially reduced its debt by around $10.8 billion before Moody’s adjustments, using $2.5 billion in FCF and around

$5.5 billion in proceeds from divestments, as well as a result of deconsolidation of the company’s agricultural subsidiary. In 2016, Glencore’s leverage declined to 3.3x from around 4.4x adjusted debt/EBITDA in 2015. Moody’s includes in its debt calculation obligations under debt-related foreign currency swaps that we understand are substantially cash collaterised but are not netted.

The Baa2 rating and the stable outlook recognise that Glencore is managing its balance sheet proactively and has confirmed its commitment to maintaining the improved credit profile in the new financial policy setting lower net leverage targets of maximum 2x net debt/EBITDA through the cycle, as calculated by the company.

Glencore maintains a solid liquidity position. Rising commodity prices drove a $6.1 billion swing in working capital in the second part of 2016, resulting in $1.2 billion working capital outflow for the year compared to the positive $4.9 billion working capital position mid-year. The company maintains substantial funding lines, which underpin its commodity Marketing operations. At the end of 2016, Glencore reported around $14 billion in available funding under its $14.5 billion committed syndicated bank facilities, comprising an $7.7 billion 12-month revolving credit facility maturing in May 2017 (with the term-out option to May 2018) and a $6.8 billion five-year 2020 revolving credit facility. At the end of 2016, the company reported cash balances of $2.5 billion.