A downgrade of struggling commodity trader Glencore’s credit rating could have significant repercussions for European high-yield indices, credit managers have said.
Glencore’s share price has plunged 70 per cent this year as investors grow concerned over its ability to service a €31bn (£21.7bn) debt burden against a backdrop of steep commodity price falls.
The firm has committed to cutting this debt, but ratings agencies are keeping a close eye on the situation and fixed income managers acknowledge a downgrade would shake-up European credit markets.
Glencore debt would account for 7.6 per cent of the European high-yield market if it was downgraded to junk status, according to Hermes. The company would also make up 1.8 per cent of the global high-yield market, second only to Brazilian oil giant Petrobras.
The trading and mining firm’s debt is currently rated two notches above ‘junk’ status by Standard & Poor’s, which moved its rating outlook for the debt from stable to negative at the start of September.
Andrey Kuznetsov, a credit analyst at Hermes, said a downgrade would be manageable on a global scale, but cautioned the impact on European and UK high-yield markets could be different.
“In relation to volatility post-downgrade, it would all depend on whether it is an expected [decision] that gives managers the opportunity to prepare… or unexpected,” he said.
“An expected downgrade could lead bonds tighter on the actual downgrade day. In case of an unexpected downgrade, it is hard to pinpoint… the extent of the move.”
Adrian Hull, product specialist at Kames Capital, said a Glencore downgrade would have a meaningful impact on the make-up of high-yield indices, but agreed the nature of the ratings agency move would be crucial.
“It really depends in what way Glencore was downgraded,” he said.
Mr Hull said the downgrade of Telecom Italia to junk status in 2013 had shown high-yield markets could deal with the arrival of a major so-called ‘fallen angel’.
Telecom Italia is currently the largest issuer in the European high-yield market, though it accounts for just 2.8 per cent of the index, well below the weighting that would be given to Glencore.
Other recent ‘fallen angels’ include Tesco in the European high-yield market and Petrobas and Gazprom in the global market, according to Hermes.
According to Tradeweb, euro-denominated Glencore debt, maturing in 2018, has seen yields go from a low of 0.7335 per cent in March to a peak of 9.089 per cent towards the end of September, firmly in high-yield territory.
Nick Hayes, manager of the Axa WF Global Strategic Bonds fund, hinted that this kind of move suggested prices may already be bottoming.
“Quite a few studies show the spread peaks just before it reaches the high-yield market, and then tightens up on a two-year view after the event because rating agencies never act short term, and the market is kind of ahead of that.”
He also said forced selling of the debt would not be a huge issue, given managers’ ability to anticipate the move. Mr Hayes added that many high-yield managers have already been adding Glencore to their funds since its yields rose.
One such manager to have added to Glencore is Ben Edwards of the BlackRock Corporate Bond fund. He said market “overreactions” had created an opportunity in the debt.
