BASIC INDUSTRIES: Glencore (GLENLN A3/BBB+/NR): Merger Impact

Jan-17 08:53

We expect modest tightening in GLENLN spreads on this. We would not assign a high probability to a merger at this point. It would be a complex transaction, and we have no visibility on advanced talks are.

  • We see Glencore adj. leverage at 2.3x/2.1x gross/net, with Rio Tinto at 0.6x/0.2x. For a combined entity we see 1.3x/0.9x, although Glencore has a different business model with its trading business alongside mining. This assumes an all-share deal.
  • ESG has been a drag on Glencore spreads; there is potential for improvement should coal be spun off as part of a deal. Rio has already exited fossil fuels and would mainly be interested in the copper assets.
  • RIOLN trades 0 to 10 wider than BHP and ~20 inside GLENLN in USD. Should a merger proceed, we would expect modest widening in RIOLN leaving perhaps 10-15bp of upside for GLENLN spreads.

    GLENLN RV 17

Historical bullets

SONIA: Early Option

Dec-18 08:45
  • SFIH5 95.65/95.75/95.80/95.90c condor, bought for 1.25 in 2k.
  • SFIM5 95.90/96.40cs vs 95.60/95.35ps, bought the cs for 0.75 in 5k.

EQUITIES: US, EU, UK Roll update

Dec-18 08:37

Equity roll pace: The December is still the front Month for Europe, but well over half the volume is now Roll related.

  • ESA: 73%.
  • NDA: 61% (below pace).
  • DMA: 69%.
  • VGA: 58% (below pace).
  • GXA: 55%.
  • Z  A: 68%.

GILTS: Modest Rally On CPI

Dec-18 08:29

Gilts rally in early trade, reacting to the inline to slightly softer-than-expected UK CPI readings.

  • Futures as high as 93.38, last +8 at 93.29.
  • Bearish technical theme intact in the contract. Initial support 93.05/00.
  • Bulls need to retake the Dec 16 low (93.87).
  • Yields 1-4bp lower, curve bull steepens after yesterday’s wage data-driven bear flattening.
  • 2s10s has unwound the reaction to yesterday’s data, but 5s30s is still ~1.5bp below Monday’s close.
  • Gilt/Bund spread last ~2.5bp tighter at 226.5bp. Yesterday saw the highest close in that spread since ’90.
  • Late Tuesday flow noted in gilt options, with the G5 97.50/98.50 call spread seeing paper pay 4 up to 5 on 10.65K.
  • SONIA futures off early highs, last little changed to +5.0.
  • BoE-dated OIS showing 60bp of cuts through ’25 vs. 56bp late yesterday, in line with pre-gilt open levels.
  • Macro and cross-market cues set to dominate during the remainder of the day.
  • Final ’24 BoE decision due tomorrow, click for our full preview.