Nov 30 -
Summary analysis -- Ineos Group Holdings S.A. --------------------- 30-Nov-2012
CREDIT RATING: B/Positive/-- Country: Luxembourg
Primary SIC: Chemical
Mult. CUSIP6: 45661Y
Credit Rating History:
Local currency Foreign currency
24-Apr-2012 B/-- B/--
18-May-2010 B-/-- B-/--
28-Jul-2009 CCC+/-- CCC+/--
23-Jan-2009 CCC/-- CCC/--
18-Nov-2008 B-/-- B-/--
The ratings on Switzerland-domiciled chemicals group Ineos Group Holdings S.A. (Ineos) and
its subsidiary Ineos Holdings Ltd. (IHL) reflect Standard & Poor's Ratings Services'
view of the group's "highly leveraged" financial risk profile and "fair" business risk profile.
We still view Ineos' financial risk profile as "highly leveraged," with sizable gross debt
of EUR7.4 billion (at end-September) and adjusted debt to EBITDA of about 5x under our scenario.
Other risk factors are concentrated ownership, group complexity, and limited disclosure on the
ultimate parent company. Mitigating factors are the company's now-strong liquidity following a
major refinancing in June 2012, and an improvement in its credit profile since the disposal of
its refinery assets in mid-2011.
The "fair" business risk profile takes into account the group's cost-competitive large-scale
integrated petrochemical sites in the U.S. and Europe, access to low-priced ethane for its U.S.
cracker and polyolefin plants, and its sizable and diversified chemical intermediate segment
(phenols, nitriles, oxides, and oligomers). We also consider that profitability has improved,
owing to severe cost reductions that were implemented in the past. Key business weaknesses
include the cyclicality of petrochemical profits and the exposure to challenging macroeconomic
conditions in Europe. We understand that Europe contributed about 60% of sales over the last 12
months to September 2012, versus less than 30% for the U.S.; given the much higher profitability
of U.S. activities, however, we estimate they recently accounted for more than 50% of EBITDA.
S&P base-case operating scenario
Compared to our estimate earlier in the year, we have slightly lowered our forecast of
Ineos' EBITDA for 2012 to about EUR1.45 billion, as a result of deteriorating petrochemical
markets and compared to EUR1.7 billion EBITDA in 2011. Nevertheless, the company reported
satisfactory third-quarter results, benefiting from record profits at its U.S. crackers, which
enjoy access to low-priced ethane. Rolling twelve-month EBITDA of EUR1.4 billion was split
EUR0.55 billion from U.S. olefins and polyolefins (O&P), just EUR0.16 million from European O&P,
and EUR0.68 billion from chemical intermediates (phenols, oxides, alpha-oligomers, and
For 2013-2014, we expect Ineos' EBITDA of close to EUR1.4 billion-EUR1.5 billion in our
baseline credit scenario, but EUR1.2 billion-EUR1.3 billion in a realistic downside case. This
assumes continued very strong profits in the U.S., but prolonged weak profitability in Europe
given the challenging macroeconomic environment.
Apart from reducing debt, the company's strategic priorities include a few growth projects
including some capacity additions in China, but notably in the U.S. where Ineos and the chemical
industry seeks to exploit shale gas opportunities. In this respect, we expect some upside to
materialize in 2015 from Ineos' plans to have U.S. ethane exported to one of its European
crackers; downside to U.S. O&P profits could however have arisen at that stage as current record
spreads between ethane and cracker's natural gas liquids could come down, in our view.
S&P base-case cash flow adequacy scenario
In view of the weaker macroeconomic and petrochemical environment, we estimate that Ineos'
adjusted debt-to-EBITDA ratio could be closer to 5x in 2012 and 4.7x in 2013, versus about 4.5x
anticipated previously. A key positive, however, is the strong improvement in Ineos' liquidity
position since the June refinancing, with surplus cash estimated at about EUR0.8 billion at
Sept. 30, 2012, and no major debt repayments before May 2015 (besides the December 2014 maturity
of its securitization program).
For 2012, we now forecast Ineos' adjusted debt to be slightly up at EUR7.2 billion (EUR6.0
billion unadjusted net debt) compared with EUR7.1 billion at the end of 2011. This also assumes
a euro-U.S. dollar exchange rate of close to 1.3x, bearing in mind about 50% of Ineos' gross
debt is now denominated in dollars. The projected small rise in debt factors in likely
weaker-than-expected 2012 funds from operations (FFO) of about EUR0.5 billion, impacted however
by exceptional debt issue costs and accrued PIK interest settlements of about EUR0.2 billion we
estimate, but also factors in a reduction in debt in the fourth quarter on the basis of an
assumed seasonal working capital inflow.
Over the medium-term we nevertheless continue to expect a gradual decrease in debt, with FFO
above EUR700 million-EUR800 million exceeding capital expenditures of EUR450 million-EUR500
million under our baseline scenario.
We currently assess Ineos' liquidity as "strong," as defined in our criteria and following
the successful refinancing of the senior facilities in June 2012. This reassessment reflects the
company's significant surplus cash balance, absence of covenants, and no near-term debt
maturities before May 2015, except for the securitization facility maturing in December 2014.
Ineos' sources of liquidity on Sept. 30, 2012, consisted of:
-- Surplus cash estimated at about EUR0.8 billion, excluding EUR0.2 billion of cash that we
treat as tied to the operations and EUR0.2 billion as restricted cash for letters of credits
-- EUR0.2 billion availability under the company's EUR1.2 billion receivables securitization
(maturing December 2014); but no more committed bank lines.
-- Funds from operations of at least EUR0.7 billion over the next 12 months.
Potential uses of liquidity are:
-- No material debt maturities in the remainder of 2012 and 2013
-- Capital spending of about EUR0.4 billion-EUR0.45 billion; and
-- Limited working capital outflows (albeit with strong seasonal inflow in the fourth
quarter but outflow in the first quarter)
The positive outlook reflects the possibility of a one-notch upgrade in 2013 if Ineos
continues to show adequate resilience to the more difficult operating environment, as was the
case in the third quarter. We would, however, need to be convinced that the company will
generate free cash flow and is able to reduce debt and improve adjusted debt to EBITDA to below
4.5x by end 2013 and beyond. At the current rating level, we see a ratio of adjusted debt to
EBITDA of 5.0x-6.0x as adequate; at the 'B+' level we would expect a ratio in the 4.0x-4.5x
We could revise the outlook to stable if Ineos' operating performance were to deteriorate
more than expected, for instance should EBITDA decline to EUR1.2 billion-1.3 billion or if we
foresaw insufficient free cash flow and absolute debt reductions, such that the adjusted debt to
EBITDA ratio is unlikely to improve to below 4.5x.