Topic A: Glencore and VW and Qantas

Question 1

Background of Glencore

Answer 1

1. Leading integrated commodity producer & marketer. Global.
2. Over 90 commodities
3. Rated BBB stable

Question 2

Glencore Timeline (10)

Answer 2

1. 2011: listed on LSE
2. 2014 Propose merger of equals with Rio Tinto
3. 19 August 2015: Results announcement
4. 6 Sep 15: S&P Announcement
5. 7 Sep 15: Company Announcement
6. 29 Sep 15: Solvency Statement
7. Market reaction - CDS spreads increased, equity price halved.
8. 2015 funding programme was completed early at attractive levels, robust liquidity position with 10.5bn in undrawn facilities.
9. FFO to net debt 29.6%
10. normally very private, but were forced into explaining what was going on

Question 3

Glencore

S&P Announcement 6 Sep 15

Answer 3

1. Negative outlook
2. FFO to debt likely to remain below 23% to 28% range.
3. , Positive discretionary CF as capex continues to reduce
4. Lower rating if reduced commitment to defend rating, if commodity prices remain low / lower further, if FFO remains below 20% could consider downgrade
5. Revise outlook if management brings FFO above 23% with continuing positive discretionary CF

Question 4

GLENCORE

List investor concerns (3)

Answer 4

1. Concerned that company would slip to investment grade, company not managing ‘huge’ debt
2. Pressure for mgmt. to “take action”
   3.

Question 5

List ways GLENCORE reduced debt dependency (2)

Answer 5

1. Equity issuance 2.5bn
2. 7.7bn cost cutting measures
   - dividend suspension
   - reduce working cap
   - sell assets
   - reduce LT loans made be Glencore

Question 6

VW
List issues (5)

Answer 6

1. 18 Sep 15: nitrogen oxide emissions from vehicles
2. USA EPA issued violation notice of Clean Air Act
3. 11m cars worldwide
4. VW provisioned for 7.4bn in repairs and compensation, likely to be insufficient
5. Regulatory investigations continuing

Question 7

VW

Market impacts

Answer 7

1. VW shares fell 20%.

2. VW bonds widened 50bps

Question 8

VW Timeline

Answer 8

1. Sep 14: Upgraded to A
2. 22 Sep: negative watch
3. 12 Oct: downgraded to A- (negative watch)
   “deficiencies in management and governance and general risk management framework”
   “internal controls inadequate for preventing or identifying illegal behaviour”
   “significant reputational and financial risk”
   “ another cut of as much as 2 notches possible”

Question 9

GLENCORE AND VW ISSUES

Answer 9

1. Both borrowed short. Now will have trouble funding / tougher to borrow
2. There was a period where you could not borrow in capital markets
3. How far ahead do you prefund

Question 10

QANTAS

Background

Answer 10

1. Jan 2014 increased borrowing costs due to downgrade of debt to junk status due to “sharp deterioration” in domestic business. Aggressive competition from Virgin.
2. 2 notch downgrade by Moodys/.
3. 1st half loss of 300m, loss of 1000 jobs
4. Company: noted that cash reserves & undrawn bank facilities = 3bn; any significant debt refinancing not required till mid 2015
5. Actions: reduce capex, cost cutting