by Chris Becker
There’s a trouble abrewing in the commodity space today and one that could be a Minsky moment for Glencore. The conglomerate – based in Switzerland and enjoying a nice tax haven status at the expense of Australia – has just announced a mammoth capital restructuring program. After buying back shares last year in a clear sign it had no investment opportunities available including a knock back from Rio Tinto, and on the back of S&P changing its outlook to negative, the company has suspended its final dividend and begun a huge capital raising to cut its enormous debt bill.
More from the Telegraph (h/t Researchtime):
The Switzerland-based company said it would raise $1.6bn by suspending its final dividend for 2015 and launched a capital-raising drive worth $2.5bn alongside other measures intended to cut its net debt from around $30bn to around $20bn by the end of 2016.
Ivan Glasenberg, chief executive, and Steven Kalmin, chief financial officer, said in a joint statement: “Notwithstanding our strong liquidity, positive operational free cashflow generation, lack of debt covenants, modest near-term maturities and the recent affirmation of our credit ratings, recent stakeholder engagement in response to market speculation around the sustainability of our leverage, highlights the desire to strengthen and protect our balance sheet amid the current market uncertainty.”
The company also said it would suspend its interim dividend in 2016 to save $800m, cut working capital by $1.5bn and raise a further $2bn from the sale of additional assets.
This is what happens when nearly free debt collides with asset prices that have hit the skids, putting pressure on paying the very low but looming interest payments. And you thought only “irresponsible” governments ran up huge debt bills at near zero interest rates?
Glencore have seen there net income fall by more than 50% in the last year as commodity prices slumped and even their near tax-free status has put pressure on the balance sheet. While this plan cuts their net debt by a third, it will result in a large dilution of shareholder wealth.
We’re going to see more consolidation and capital restructuring and diluting as the commodity bear market plays out. The bottom will be in when companies like Glencore are sitting on near pristine balance sheets and only start picking at low hanging fruit projects out of conservatism as commodity prices languish in a doldrum. That will be the time to buy again.