Ineos Defying 99% Default Odds Wins Rate Cuts: Corporate Finance
2013-05-02 15:48:23.462 GMT
By Krista Giovacco and Julie Miecamp
May 2 (Bloomberg) -- Just four years after careening toward default, Ineos Group Holdings Inc. is casting off its reputation as the world’s least-creditworthy chemical maker by winning a second rate reduction on its loans in 13 months.
The company, whose biggest customers include Procter & Gamble Co. and Unilever NV, will save about $117.9 million next year as it trims interest on $3 billion in borrowings by 2.5 percentage points to an initial rate of 4 percent on the biggest loan. The annual cost to shield 10 million euros ($13.2 million) of Ineos debt from default for five years, which in 2009 implied a default probability of 99 percent before the company paid creditors to waive debt covenants, fell to a record-low 119,500 euros yesterday. Its $677.5 million of 8.5 percent notes due in February 2016 traded at 101.8 cents yesterday, up from 51.25 cents on Feb. 27, Bloomberg prices show.
Crippled with about $8.57 billion of debt after an asset purchase from BP Plc seven years ago, Ineos is now profiting from U.S. prices for polypropylene used in food-packaging products that have more than doubled in the past four years, according to data compiled by Bloomberg. Standard & Poor’s last week raised its rating on the company to B+ from B, noting a “resilient” 2012 performance in North America that “largely offset” waning European results.
‘They’re Happy’
“As long as investors believe the U.S. business remains strong, they’re happy to lend to Ineos,” Jayanth Kandalam, a senior credit analyst at Lucror Analytics Pte. in Singapore said in a telephone interview. “The strength of the U.S. business is offsetting lack of demand in Europe for its products.”
Richard Longden, a London-based spokesman for Ineos, didn’t return an e-mail seeking comment about the company’s finances and loan transaction.
Polypropylene prices rose to $1,405 per metric ton on April 26 from a low of $587.50 on Dec. 19, 2008, Bloomberg data show.
The Rolle, Switzerland-based company’s earnings before interest, taxes, depreciation and amortization from its North American markets rose 48 percent in 2012 to 706 million euros from 477 million in 2011, according to data on its website.
Ineos’s net debt equaled 4.3 times Ebitda at the end of March, less than half the 9.1 at the end of 2008, according to the company statement and Bloomberg data.
The chemicals maker had 6.5 billion euros of debt, 1.03 billion of cash and 290 million euros of available drawings under working-capital facilities, according to the statement.
Removed Covenants
“Since 2009 the company has done a lot of work on its operations and balance sheet,” Olivier Monnoyeur, a high-yield portfolio manager at BNP Paribas Asset Management in Paris, said in a telephone interview.
Ineos obtained a $3.03 billion loan in April 2012 without financial maintenance covenants to refinance part of its senior credit facilities that had such covenants. The company no longer has to abide by leverage or interest-expense maximums.
The S&P ratings increase is the second in a year for Ineos.
S&P has a “stable” view on the company, citing its “strong liquidity and the benefit of its longer-term debt maturity profile following the refinancing,” S&P analysts led by London- based Paulina Grabowiec wrote in an April 25 report.
The largest borrowing, a $1.97 billion loan due in 2018, will pay higher interest if the three-month London interbank offered rate exceeds 1 percent, floating at 3 percentage points above the benchmark.
Libor Decline
Libor, the rate at which banks say they can borrow from each other, was set at 0.27 percent yesterday has declined from more than 5.73 percent in September 2007.
Ineos will pay initial interest of 2.27 percent on a $370 million credit due in 2015, down from 5.5 percent. The rate will float at 2 percentage points above Libor.
A 494 million euro loan due in 2018 will pay initial interest of 4.25 percent, down from 6.75 percent. The rate will increase if euribor, which was set at 0.2 percent yesterday, exceeds 1 percent.
The company is increasing its loans due in 2018 by $640 million and 350 million euros.
“Ineos is tapping the loan market opportunistically to get costs as low as possible so that when a downturn comes, they can weather it,” Ky Van Tang, a senior credit analyst at Canaccord Financial Inc. in London, said in a telephone interview. “A swing in margin hurt them in 2008/2009.”
2009 Modification
Ineos, created as a management buyout of Belgian assets of BP Plc, renegotiated loans at more expensive rates and tighter conditions in 2009 after borrowing 7.5 billion euros to buy BP’s Innovene unit in 2005 before demand for chemicals collapsed during the recession.
Creditors agreed to modify requirements for Ineos’s leverage, or debt to earnings ratio, and interest coverage and debt coverage in 2009 to prevent a breach under the company’s credit pact. It reset its conditions, or covenants, in exchange for a consent fee, higher interest margins and a guaranteed minimum level for the benchmark euro interbank offered rate, or Euribor.
“Since the fourth quarter of 2008, and similarly to most other chemical groups, Ineos has faced material demand decline, resulting in lower capacity utilization and subsequent weak profitability,” S&P analysts wrote in a July 28, 2009, report.
Recovering Demand
Demand for chemicals recovered following the financial crisis. An index of U.S. chemicals output was 6.1 percent higher on a seasonally adjusted basis in March than at the end of 2008 and European production was 16.7 percent higher in February, Bloomberg data show.
The company’s Ebitda gain last year dwarfed the 4 percent rise in 2008, Bloomberg data show.
“Ineos has an exceptional story,” Monnoyeur said.
“Concerns over Ineos have dissipated. More generally in the market there will be more confidence in credits that have proved they can face hard times.”
The company’s credit default swaps, a measure of investor sentiment that rises when confidence wanes and falls as it improves, traded at 86.5 percent upfront in January 2009, according to CMA, the data provider owned by McGraw-Hill Cos, indicating the market was pricing in a more than 99 percent chance of default over five years.
Bond Sale
Yesterday’s price indicates a default probability of less than 14 percent. As recently as July, the company had the highest perceived default risk among 54 global chemicals makers with swaps tracked by Bloomberg.
Ineos is selling $678 million of senior bonds and 250 million euros of notes that expire in 5.25 years, according to a person familiar with the offering. Proceeds will repay notes due in 2016 said the person, who asked not to be identified because the information is private.
The company’s 1.53 billion euros of 7.875 percent notes due in February 2016 traded at 101.7 cents to yield 7.18 percent yesterday, according to Bloomberg prices. The notes traded as low as 8 cents in March 2009.
“The fact that Ineos doesn’t have maintenance covenants left on its loan facility and Libor being where it is makes it attractive to go into the loan market at this point,” said Lucror’s Kandalam.