A “sustained improvement” in operating performance and continued conservative management of the balance sheet structure and leverage profile have resulted in a ratings upgrade for Glencore (LON:GLEN).
In a note to clients, Moody’s said it has upgraded to Baa1 from Baa2 the long term issuer rating of Glencore, and to Baa1 from Baa2 the group's senior unsecured instrument ratings. Glencore's P-2 short term ratings were affirmed.
Moody's also upgraded to (P)Baa1 from (P)Baa2 the senior unsecured rating on Glencore's medium-term note (MTN) programme. Concurrently, Moody's changed the outlook of Glencore's ratings to stable from positive.
“While we don't expect Glencore's financial profile to strengthen further beyond the level achieved in 2018, sustained low production cost and reduced debt levels have increased the company's resilience to volatile commodity prices," says Sven Reinke, a Moody's Senior Vice President.
The upgrade reflects Glencore's resilient performance over the last 2 years which Moody's considers sustainable. Glencore's credit profile has strengthened further driven by higher commodity prices and sustained low production cost positions. Moody's adjusted debt/EBITDA fell to 1.7x in 2018 from 1.8x in 2017 and 3.0x in 2016.
With adjusted leverage of no more than 2x, Glencore has met Moody's quantitative requirement for a Baa1 rating since 2017.
“Sustained improved EBITDA generation, reduced leverage and higher funds from operations (FFO), supported by the conservative dividend policy, which aligns dividend payments more closely with free cash flow generation, enables Glencore to better withstand volatility in the commodity markets,” Moody’s noted.
Based on the mid-point of Moody's conservative range for commodity price assumptions for copper ($2.50/lb), zinc ($1.10/lb), and thermal coal ($75/MT), and adjusted for the higher actual average prices realised during the first four months of 2019, Moody's projects Glencore's adjusted EBITDA to fall to around $13.5 billion this year from $15.6 billion in 2018.
Despite the EBITDA driven decline in funds from operations (FFO) and capital expenditures at the increased 2018 level, Moody's forecasts Glencore's free cash flow generation (FCF) to remain positive at around $2 billion in 2019.
Under this conservative scenario, Glencore's financial profile would largely sustain the recent improvements and the company would continue to meet Moody's quantitative guidance for a Baa1 rating.
“The Baa1 rating reflects Glencore's solid position as a large, diversified commodities mining and marketing company with a large and well-diversified portfolio of mining assets. 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,” the agency concluded.
