Glencore shares collapse leaves wealth funds with big losses

The further collapse of Glencore’s share price this week has spooked world markets as the prospect of a deeper commodities depression looms, while leaving its sovereign wealth fund investors with deep losses.

Glencore shares were down nearly 30 per cent over the previous five days and are worth less than one-quarter their value at the midsummer high of about 317 pence, even after bouncing 17 per cent by early yesterday afternoon in London to 80 pence.

Glencore was heavily backed by Aabar Investments, a unit of International Petroleum Investment Company (Ipic), when it floated its shares on the London Stock Exchange in 2011.

Aabar at the time was a “cornerstone” investor, taking a US$1 billion stake when the company was initially valued at about $60bn, which made it Glencore’s largest investor apart from company executives.

There was initially talk of joint projects and investments to come between Glencore and Aabar. But Glencore was troubled from the beginning, underperforming its natural resources peers by 10 per cent in its first year as a public company, and Aabar decided to write off about 40 per cent of the value of its Glencore holdings ($392 million of the $1bn investment) by the end of 2012.

At the end of last year, Ipic’s accounts showed it owned 0.75 per cent of Glencore with a carrying value of just over $460m, down from about $512m at the end of the previous year.

Glencore’s shares have since fallen a further 75 per cent from the start of the year, which would leave Aabar/Ipic’s stake worth about $115m, assuming it still owns the same stake and it is unhedged. Glencore’s public share register does not currently show a shareholding under Aabar/Ipic’s name.

A spokesman for Aabar/Ipic cited company policy to usually make no comment in response to inquiries about the share stake.

The biggest loser in Glencore’s collapse is its largest shareholder, Qatar Holdings, a unit of Qatar Investment Authority, which has a stake of more than 8 per cent.

Qatar Holdings’ stake was acquired when the wealth fund more than doubled its share in Xstrata as part of its battle with Glencore just over two years ago to fight for better terms when it acquired Xstrata, a fight it eventually won. That left it as the combined group’s largest shareholder, just behind the chief executive Ivan Glasenberg, who owns 7.65 per cent of the company.

Among the Qataris’ sovereign wealth fund backers in the takeover fight was Norway’s sovereign wealth fund, Norges Bank Investment Management, which still is a major shareholder with a stake of 1.7 per cent.

The latest round of selling was triggered by a report on Monday by the Investec analyst Jeremy Wrathall, who issued a stark warning: “If major commodity prices remain at current levels, our analysis implies that, in the absence of substantial restructuring, nearly all the equity value of both Glencore and Anglo American could evaporate.”

Glencore had only last month tried to address the growing concerns about its debt load and the sharp downswing for commodities prices by restructuring, including a commitment to raise $2.5bn in equity and cancelling its $2.4bn dividend payout.

The company also committed to reduce capital spending over the next year by $1bn to between $10bn and $10.5bn and to sell off assets, such as Australian coal and South American copper interests. The latter efforts have already run into headwinds because of the dire market conditions for commodities producers, largely because of the slowdown in China’s economic growth.

While the debt rating agencies have commended Glencore on its efforts, both Moody’s Investors Service and Standard & Poor’s have issued negative outlooks for the company this month.

S&P reckoned that Glencore’s earnings could fall further this year, to about $9bn to $10bn, compared with $12.9bn last year, keeping it under strain as it carries a gross debt load of about $50bn.

Elena Nadtotchi, a Moody’s analyst, says that Glencore “is taking appropriate proactive steps, including equity issuance and suspension of dividends, to rebuild its financial flexibility and safeguard its balance sheet”.

She expects that it will get its debt-to-earnings ratio back to 3.5 times after it balloons out to 4 times this year to maintain its “investment grade” rating, assuming it follows through with the measures announced and that commodities markets level off.

But shareholders are bearing the brunt of the company’s woes in the meantime.

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