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Derivatives

Glencore dividend marks full CDS reversal

When a company announces that it is increasing the amount paid out to shareholders, it is not typically greeted with enthusiasm by credit investors. But Glencore is no ordinary company in the credit default swap world, and its announcement on Thursday wasn’t a standard change in financial policy.

Gavan Nolan, IHS Markit

The Swiss firm said that it would be resuming dividend payments after a hiatus of more than a year. Back in September 2015, Glencore was groaning under the weight of its debt burden and struggling to cope with falling commodity prices.

Five year CDS spreads widened from 350bp to 850bp in the space of two weeks. Glencore’s investment grade rating was vulnerable, and bondholders had the whip hand. The dividend was stopped and the company was forced into selling more equity, thereby diluting shareholders.

Thursday’s announcement [see separate story in our Corporate Bonds section] marks the start of a shift in financial strategy, which will obviously be welcomed by equity investors. But the dividend resumption doesn’t tell the whole story. Glencore’s turnaround — surely one of the more striking in recent times — was driven by bondholder-friendly actions such as asset sales and reductions in capital expenditure. These moves enabled the firm to reduce debt to more manageable levels.

Glencore’s success in achieving its aims is reflected in the company’s CDS spreads. In January of this year, the five year spreads were quoted in excess of 1,100bp. By Thursday this week the level was 184bp, the tightest since July 2015.

During its time of distress, Glencore was often the most heavily traded name in the corporate CDS universe. In the current day, though still liquid, its volumes are unexceptional. This reflects its credit improvement, as well as the rise in commodity prices. (Glencore was sometimes viewed as a proxy for commodity risk.)

Glencore was the widest name in the Markit iTraxx Europe for some time — now that honour belongs to UniCredit, closely followed by Deutsche Bank and Mediobanca. Credit investors will expect that Glencore continues on its impressive path and reduces debt even further.

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