Glencore PLC, the commodities group that's lost almost $45 billion (U.S.) in market value this year, rallied the most ever after the company said it can withstand current market conditions.
The shares surged 17 per cent to 80.25 pence in London, recouping some of the 30-per-cent slump Monday driven by concern the company has too much debt to withstand the declines in commodities. Even so, Glencore's credit-default swaps rose again today, signalling the company has a 53-per-cent chance of default in five years, according to data from S&P Capital IQ's CMA.
"Our business remains operationally and financially robust – we have positive cash flow, good liquidity and absolutely no solvency issues," according to the statement from the company. "Glencore has no debt covenants and continues to retain strong lines of credit and secure access to funding."
Glencore investors including Legal & General Group PLC had pushed the firm to break its silence, saying the company faced a "quasi-Lehman moment," where rumours about the company's viability hurt the stock amid a lack of information from its leadership.
"Investors can overreact on limited information," said Keith Pilbeam, a professor of economics and finance at City University London. "You can't just sit back and take a 30-per-cent hit to your share price; this, you have to react to."
Tuesday's rebound notwithstanding, the assurances from Glencore are unlikely to put to rest the questions swirling around the company. Indeed, the remarkable, two-day run in the stock market – down 30 per cent Monday, up 17 per cent Tuesday – only adds to concerns that the industry is opaque.
Glencore has been embroiled in a China-led slowdown that's hit prices for commodities from oil to copper to coal, heightening worries about its debt and sending the shares down 73 per cent this year. To cope, chief executive officer Ivan Glasenberg is working on a debt-reduction plan that includes selling assets, halting the dividend and a $2.5-billion (U.S.) share sale completed earlier this month.
The stock rose earlier in the day as analysts said the rout probably didn't reflect the company's true value and Citigroup Inc. wrote management should consider taking the company private.
"The pummeling of Glencore yesterday was irrational," Robin Bhar, an analyst at Société Générale SA, said by phone from London. "Unless you think commodity prices are going close to zero, then this was overdone."
Glencore, based in Zug, Switzerland, trades everything from wheat to oil to cobalt. It's the world's biggest exporter of power-station coal, with more than 30 mines in Australia, Colombia and South Africa, and is among the top three agricultural exporters in Russia, the European Union, Canada and Australia. The company controls more than 150 mining and metallurgical, oil production and agricultural assets and employs about 180,000 people.
The cost of insuring its debt against default for five years fell to a spread of 857 basis points as the stock climbed, down from 938 basis points earlier in the day, according to CMA.
Glencore's €1.25-billion ($1.9-billion Canadian) of 1.25-per-cent bonds maturing March, 2021, rose 1.4 cents (U.S.) on the euro to 70 cents, the first increase in seven days, according to data compiled by Bloomberg.
In the first half, Glencore reported an adjusted net profit of $882-million, down from $2-billion a year earlier. The trading business reported earnings before interest and tax of $1.07-billion.
At its height in 2014, Glencore was worth more than $85-billion after its $29-billion all-share takeover of Xstrata PLC, then the world's biggest coal exporter. Now, the market value has shrunk to $17-billion as investors fled the company, which carries more debt than its rivals.
The company has a total debt-to-equity ratio of 104 per cent, according to Bloomberg data. That's more than double its rivals at Rio Tinto Group and BHP Billiton Ltd.
The company has hired Citigroup and Credit Suisse Group AG to sell a minority stake in its agricultural business, a person familiar with the situation said Friday.
"Glencore is now under pressure to strengthen its balance sheet via asset sales or a capital injection, and time is of the essence," Chris LaFemina, an analyst at Jefferies LLC, wrote in a note Tuesday. "There is value in Glencore shares if the company can pull the appropriate levers now, but risks are clearly very high."
Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.
Editor's note: An earlier version of this story incorrectly said Glencore shares closed Tuesday at 80.25 pounds. The shares actually closed at 80.25 pence.