The sector offers some of the cheapest
IG bonds and best opportunities to sell
1 year protection in CDS, in our view
􀀗 We expect liquidity, not leverage, to be
the main driver for credit ratings in 2009
􀀗 Overweight given cheap valuations;
high conviction Overweight ideas:
Glencore, Xstrata; key Underweights:
Anglo American, Rio Tinto
High yields for a high grade sector
Investors looking for high yields from investment grade
companies should turn to the Metals & Mining sector, in our
view. The current market dislocation has created some
opportunities in the cash market and at the short-end of the
CDS curves. The Glencore/Xstrata cash bonds offer yields
of between 16% and 20% in euro, pricing in significant
rating downside. This looks overdone given our expectation
that both companies will keep investment grade ratings in
2009, which should be another weak year for commodity
prices. In CDS, flat credit curves leave us sellers of shortdated
protection on the widest names with no liquidity issues
(Glencore, Xstrata).
Focus on cash preservation
We generally feel that the credit markets currently
underestimate the ability of experienced management teams
to react and move towards cash preservation in a severe
downturn. Looking at the sensitivity of leverage and
liquidity to falling earnings, we conclude that the key driver
of credit ratings in 2009 will be the ability of the sector to
maintain adequate liquidity profiles, leaving the prospects
for dividend cuts (Anglo, Rio, Xstrata) and potentially a
rights issue (Rio) if the promised asset sales do not
materialise quickly. We think Rio and Anglo will be most
under pressure to manage large debt maturities coming due.
We are Overweight the sector
Cheap valuations vs other less cash-generative cyclical
sectors leave us Overweight Metals & Mining. We have
upgraded Glencore to Overweight from Neutral and resumed
our recommendations on BHP Billiton (Neutral) and Rio
Tinto (Underweight).