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Ineos Bonds Point to Third Ratings Upgrade

Bonds of Ineos Group Holdings Plc, the chemical company that averted default two years ago following a debt-fueled expansion, are signaling that further upgrades to its credit rating will come as officials refinance borrowings and sell assets.

While Moody’s Investors Service lifted Ineos one level to B2 on July 15, its $570 million of 9 percent dollar-denominated notes due 2015 yield 7 percent, on par with companies rated at least two levels higher, according to a Bank of America Merrill Lynch index. The gauge represents issuers including French carmaker PSA Peugeot Citroen, Russian steelmaker OAO Severstal and airline Deutsche Lufthansa AG.

Ineos has raised $2 billion from bond and asset sales since it was forced to renegotiate borrowings with 230 senior lenders in 2009. The U.K.’s biggest private employer ran into trouble after taking on 7.5 billion euros ($10.5 billion) of debt to buy BP Plc’s Innovene unit in 2005, just before demand for raw materials collapsed and the global economy went into recession.

The “Moody’s upgrade won’t be the end of the rating improvement story for Ineos,” said Andrew Wilmont, a money manager who helps oversee $15 billion of high-yield debt at Axa Investment Managers in London. “We got out of Ineos bonds in 2007. During the crisis, the company’s revenues dropped off a cliff. The turnaround since then has been remarkable, so our European funds bought the bonds back at the end of 2009.”


Bond Returns

Bonds of Ineos, which relocated to Rolle, Switzerland, from the U.K. last year to cut tax expenses, have returned 13.6 percent this year, compared with 5 percent for the company’s peers, Bank of America Merrill Lynch index data show.

Investors in the company’s $677.5 million of 8.5 percent notes due February 2016 have seen prices recover to 99.8 cents on the dollar from 12 cents in 2009, according to Bloomberg generic prices. Its 1.53 billion euros of similar-maturity 7.875 percent notes are quoted at 94.75 cents.

“We’ve learned an awful lot more about the market by spending a lot of time and energy trying to help investors holding our paper to better understand our business,” Ineos Group Director Tom Crotty, based in Runcorn, England, said in an interview. “We’ve been a lot more open in our approach to our creditors and that’s something we will continue doing. We felt we were harshly treated in the downturn.”

Renegotiating Debt

Ineos renegotiated its borrowings in 2009, asking lenders to waive certain conditions governing its debt-to-earnings ratios and other requirements as demand for raw materials declined.

Derivatives traders were assigning Ineos almost certain odds of default in January 2009. The price of credit-default swaps tied to 10 million euros of the company’s debt reaching 8.28 million euros upfront plus 500,000 euros annually for five years.

Contracts tied to the debt have fallen 39 percent this year to 445 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. A basis point equals 1,000 euros annually on a contract protecting 10 million euros of debt.

Moody’s assigned Ineos a “positive” outlook when it lifted the company’s grade last week, meaning it’s more likely to follow with another increase. At its lowest, Ineos was rated Caa2 by Moody’s, eight levels below investment-grade.

S&P’s Caution

Standard & Poor’s, whose B- rating for Ineos is one level lower than the one assigned by Moody’s, said July 4 it may boost Ineos by one step in the next six to 12 months if the company continues to deleverage. The firm said in a July 4 statement that it expects Ineos to cut adjusted debt to below 7.3 billion euros by year-end from 8.2 billion euros at the end of 2010.

“We still view Ineos’ financial risk profile as highly leveraged, given continued low credit metrics, despite material debt reductions in 2010 and 2011,” S&P said in a July statement. “We also perceive that Ineos has low financial flexibility in light of a high interest burden, and potential for covenant breaches in 2012-2013, given tightening covenant levels.”

Ineos stands to cut annual interest expense by almost 100 million euros after rising earnings helped reduce debt to 3.5 times its earnings before interest, tax, depreciation and amortization, Crotty said.

Next Phase

“We feel we deserved the recent upgrade,” Crotty said. “We did not expect a multiple-notch improvement in one go since rating agencies tend to be more cautious, but it is clear that there is a positive outlook and this reflects expectations for the future.”

The next phase of refinancing involves 650 million euros of junior-ranked pay-in-kind loans which accrue more interest than senior debt, the company said in March.

Barclays Plc and JPMorgan Chase & Co. are advising Ineos on a sale of high-yield bonds to refinance debt, two people with knowledge of the plan said in May. It has two bonds that may be redeemed next month.

“The company should be able to refinance the bonds with cheaper ones using floating-rate notes” depending on demand from collateralized loan obligation funds, said Steven Mitra, a partner at LNG Capital LLP. CLOs, which traditionally have invested in leveraged loans, have piled into floating-rate bonds this year amid record loan redemption’s.

Ineos’s first-quarter profit climbed to 726 million euros, from 494 million euros in the previous three months, according to the company. Debt, which totaled about 6.7 billion euros as of the end of March, will fall as it sells assets including a PVC pipe and resin maker to Mexichem SAB, Ineos said.

Ineos sold a stake in a European refinery to PetroChina Co. for $1.02 billion this year, and said it’s in talks for a new venture with the Chinese company.

“The carving out of the more volatile refining operations will reduce the operating risk profile of the rated group and further mitigate financial risks previously associated with managing significant working capital requirements of the refining business within the leveraged capital structure,” Moody’s said in a July 15 statement.

By Patricia Kuo (Bloomberg)