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First Reserve: Smarter than Glencore?

How a US private equity firm got its timings right on investing in the commodities company.

In the second week of September, as gathering investor fears over the outlook for the world economy drove volatility across risk asset classes and closed out all but the highest-quality names from new issues, First Reserve, a US-based private equity firm, took the capital markets by surprise.

The leading private investor in the global energy industry engaged Credit Suisse and Morgan Stanley to sell off through an accelerated book-build its entire holdings of Glencore convertibles. First Reserve had paid $800 million for the biggest single position in Glencore’s $2.3 billion pre-IPO convertible back in December 2009. Now it cashed this in, raising some $1.1 billion. Monetizing the in-the-money embedded option that had been priced at a conversion premium of 350p back in 2009, with Glencore stock now trading at 406p in early September, wasn’t the surprise. The convertible had always been an unusual instrument for a private equity firm to own.

The timing of the sale was intriguing, however, disproving the contention of some pessimistic bankers that large offerings of equity-linked securities were impossible amid such market turbulence. In the event, there was demand for an instrument combining equity upside in Glencore with the downside protection of bond coupons and seniority in the capital structure, including from specialist convertible investors that wanted to hedge their new positions in the previously little-traded convertibles by selling Glencore stock.

What really caught the attention was what First Reserve, whose chief executive William Macauley is also a non-executive director of Glencore, did with the proceeds. It immediately ploughed the cash raised straight back into Glencore equity, bidding a premium to the previous close of 406p and acquiring 141 million shares at 425p. In a volatile stock market, First Reserve wanted none of the downside protection but rather a pure play in the equity risk of a company that had floated shares at 530p in May and then watched them sink to as low as 350p – the conversion premium price on the convertibles – on August 19. Amid a stock market rout, First Reserve wanted fully loaded equity risk and bought plenty of it from takers of the convertibles.

"This is a strong statement of support for Glencore by a very prominent investor in the natural resources sector," says Michel Antakly, managing director in the investment banking division at Morgan Stanley, the firm that also was one of three global coordinators on the initial public offering of the Switzerland-based commodities trader and mining company. Glencore’s share price closed up 7% on announcement of the trade and touched 450p a fortnight later on September 19. Following the First Reserve trade, news broke that Glencore’s chief executive Ivan Glasenberg was also spending £20 million ($31 million) – spare change to him no doubt after the company’s dividend payout – to add more Glencore stock to his already sizeable personal exposure.

see also:

How Glencore crashed through the equity markets

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