October 23, 2017 / 9:48 AM / a year ago

Fitch Assigns Ineos 'BB+' Rating; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 23 (Fitch) Fitch Ratings has assigned Ineos Group Holdings SA (Ineos) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB+' with a Stable Outlook. Fitch has also assigned a rating of 'BBB-' to the EUR770 million senior secured notes due 2023 issued by Ineos Finance plc and a rating of 'BB' to the USD500 million and EUR650 million subordinated notes due 2024 issued by Ineos. At the same time, Fitch has assigned Ineos Finance plc's proposed euro term loan due 2024 and Ineos US Finance LLC's proposed US dollar term loan B due 2024 an expected senior secured rating of 'BBB-(EXP)'. The assignment of a final rating to the term loans is contingent on the receipt of final documents conforming to the information already received. The 'BB+' rating reflects Ineos's solid business profile as one of the world's largest commodity chemical producers, benefiting from leading market positions in the US and Europe, large-scale efficient integrated production facilities, low (shale gas in the US) to average (naphtha in Europe) feedstock costs, feedstock flexibility in US and European crackers with secured supply of low-cost US shale gas, deep integration with suppliers and customers, and economies of scale. The rating is constrained by the company's exposure to cyclical and commoditised chemicals and the resulting inherent earnings volatility and a financial profile commensurate with a 'BB' category rating, with its lease-adjusted funds from operations (FFO) net leverage expected to remain around 3.0x-3.5x over the next two to three years under our base case. Ineos also has corporate governance deficiencies compared with other privately owned Fitch-rated issuers with similarly concentrated ownership. Specifically, this includes limited transparency around dividends and related-party funding decisions, absence of independent directors on the board, and key person risk. The Stable Outlook reflects Fitch's view that the fundamental sustainable operational changes and deleveraging achieved by Ineos over the past few years will allow the group to maintain a credit profile commensurate with a 'BB+' rated entity despite higher capex and weakening US margins. KEY RATING DRIVERS Large Scale, Commodity Chemicals Manufacturer: Ineos is an intermediate holding company within the wider Ineos group, which operates within the commoditised petrochemical segments of olefins and polymers (O&P). The group is one of the world's largest commodity chemical manufacturers, with sales of EUR12.6 billion in 2016 and 31 manufacturing sites in six countries in North America and Europe. The company's products are the key building blocks to create a variety of olefin derivatives and serve a broad and diverse range of end markets, including packaging, construction, automotive, white goods and durables, agrochemicals and pharmaceuticals. Cyclical Credit Profile: The inherently cyclical nature of the commodity chemicals sector means Ineos is subject to feedstock and end-product price volatility, driven by prevailing market conditions, demand/supply drivers - especially with new lower-quartile capacity coming online globally - and customer stocking/de-stocking patterns. Ineos manages volatility by capitalising on its critical mass as a leading integrated petrochemical producer, with strong links to a large customer and supplier base, and by leveraging on its flexibility over feedstock in its production sites. Earnings volatility is also mitigated by the company's geographical and product diversification. Step Change in Performance: The company's EBITDA margin doubled to 18% in 2016 from 2013 owing to a combination of supportive market fundamentals, sustainable underlying operational improvements and changes in the consolidation perimeter. The group has also benefited from top-of-the-cycle margins in its shale-based US operations and has shored-up its European operations by cutting fixed costs, investing in the capacity to switch feedstock at its crackers and in shipping and storage facilities for low-cost US shale-based ethane to be used by its cracker in Norway. Margins also improved following the removal of the underperforming Grangemouth and Lavera operations from the consolidation perimeter of Ineos; while these businesses are not in the restricted group rated by Fitch, the agency understands that they have also benefited from efficiency and cost-cutting measures over the past three years. Supply-driven Margin Pressure: Fitch expects the EBITDA margin to fall to 13% by 2020 after planned capacity additions in the US normalise top-of-the-cycle margins, however, a low Fitch-projected oil price should uphold European performance. The cost advantage for US ethylene production based on natural gas liquids feedstock has spurred capacity expansion activity, with around 10 million tonnes of ethylene capacity likely to come online by 2019. Fitch forecasts EBITDA at around EUR2.5 billion in 2017 (2016: EUR2.3 billion), boosted by better earnings across all businesses, solid European polymer and chemical Intermediate demand and improved butadiene pricing. Capex and Acquisitions Constrain Cash Flow: Fitch forecasts free cash flow (FCF) margins of 3%-4% in 2018, down from the 9% 2015-2016 average, due to supply-driven margin pressure, higher dividends in line with large payment in 2016 and elevated capex. This includes capex for the USD2 billion European petrochemicals expansion to produce propylene within Europe. Recent acquisitions, aimed at building up the group's exploration and production business, have largely been outside Ineos, but have been funded partially through arm-length related-party loans from Ineos. Our base case does not include any acquisitions, but businesses that sit outside the group may become dependent on Ineos to support their own acquisitions and financing, which could lead to a negative rating action. Corporate Governance Deficiencies: The company's corporate governance deficiencies are incorporated into its 'BB+' rating and centre around its board structure, which does not have independent directors, its three-person private shareholding and key person risk. The structure of the wider Ineos group is also complex, with restricted group perimeters around certain businesses, and limited transparency on Ineos' strategy around related-party transactions and dividends. These factors are mitigated by the strong systemic governance in the countries where the group operates and its record of no governance failures, reasonable dividend distributions, related-party transactions on an arm's length basis, and solid financial reporting. Leveraged Financial Profile: We expect FFO adjusted net leverage to remain within our rating guidelines at around 3.0x-3.5x over the next two to three years. Over the past four years, IGH's net leverage has gradually reduced on the back of strong earnings and we forecast FFO adjusted net leverage at 2.9x at end-2017 compared with 3.3x at end-2016. Refinancing exercises have simplified the company's capital structure and Ineos intends to use the proceeds from the repayment of its USD250 million loan Styrolution to repay part of its outstanding senior secured loans. Strong Recoveries for Secured Debt: Up to 82% of the company's total debt consists of senior debt secured by first-ranking share pledges and is rated one notch above the IDR to reflect exceptional recoveries. The notching differential between the IDR and subordinated debt ratings reflects the structural and contractual subordination of these obligations, which is likely to result in poor recovery rates. DERIVATION SUMMARY Ineos's credit profile reflects its large operating scale, with manufacturing sites across North America and Europe, as well as its focus on the production of volatile and commoditised olefins and derivatives, making it consistent with sector peers, such as Westlake Chemical Corporation (BBB/Stable), Saudi Basic Industries Corporation (SABIC) (A+/Stable), NOVA Chemicals Corporation (BBB-/Negative) and PAO SIBUR Holding (BB+/Negative). Ineos has stronger market-leading positions, is of larger scale and diversification, has production flexibility and a stronger ability to transport products compared with Westlake, SIBUR and NOVA, which are more regional petrochemical companies. Fitch therefore considers Ineos to have a stronger business profile than these peers. Ineos has an overall weaker feedstock position due to its lower-margin European O&P and intermediates business, but this has not affected its free cash flow margin, which remains strong against those of peers, and which Fitch forecasts to remain positive over the next two to three years. Ineos also differs from peers due to its three-person private shareholding and related-party transactions to other businesses in a much larger overall group. The Ineos group also contains chlorovinyls, styrene, refining joint ventures, other petrochemical assets and an upstream business. Fitch incorporates the company's corporate governance deficiencies within its rating, but does not specifically notch down as a result of it due to the strong systemic governance of the countries in which Ineos operates, its history of paying reasonable dividends and no corporate governance failures, related-party loans being made and repaid on an arm's length basis, and an adequate record of financial reporting. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - An overall projected reduction in utilisation rates within the US and Europe to more normalised rates in 2018 as a result of new capacity additions. - A lower EBITDA margin within O&P in the US from 33% to mid to low 20%, from 33% in 2017, over the next two to three years due to US capacity additions - 15% tax rate - EUR200 million of restricted cash mainly in relation to collateral posted - Annual capex averaging at over EUR1 billion over the next two to three years - Dividends in line with the 2016 level of around 18% of net income, including management fees to Ineos AG - EUR40 million of pension contributions each year - No related-party outflows, apart from around USD376 million to be made to the upstream business for DONG Energy A/S's (BBB+/Stable) assets in 2017, minus a EUR127 million repayment from the Grangemouth loan in 2017 and a forecast EUR250 million repayment from the Styrolution loan. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - FFO adjusted net leverage maintained at or under 2x through the cycle and through the peak of capacity additions. - A significant improvement in corporate governance; in particular, better transparency on decisions regarding dividends and related-party loans, a more varied shareholding structure mitigating key person risk and independent directors on the board. Developments that May, Individually or Collectively, Lead to Negative Rating Action - Through the cycle market pressure, excessive capex and/or related party loans pushing the EBITDA margin below 10%, the FCF margin below 1.5% and/or FFO adjusted net leverage over 3.5x. - A significant deterioration in the business profile that may come from deterioration in cost advantage, scale, diversification and product leadership. - An incidence of corporate governance failing, including, but not limited to, transparency of reporting, beneficial shareholder actions or related-party loans on favourable terms. LIQUIDITY Ineos had access to readily available cash of EUR1.2 billion and a securitisation facility of EUR 800 million as of end-June 2017, of which EUR289 million had been drawn. However, as this is a receivables securitisation facility, Fitch does not consider it as a liquidity source. Liquidity is comfortable and in excess of minimum operational cash requirements. FULL LIST OF RATING ACTIONS Ineos Group Holdings S.A -- Long-Term Foreign-Currency Issuer Default Rating assigned at 'BB+'; Stable Outlook -- Subordinated long-term rating on USD500 million and EUR650 million bonds due 2024 assigned at 'BB' Ineos US Finance LLC -- Long-term senior secured expected rating on proposed 2024 US-dollar term loan B assigned at 'BBB-(EXP)' Ineos Finance plc -- Long-term senior secured rating on EUR770 million 2023 bond assigned at 'BBB-' -- Long-term senior secured expected rating on proposed 2024 euro term loan B assigned at 'BBB-(EXP)' Contact: Principal Analyst Amee Attri Director +44 20 3530 1617 Fitch Ratings Ltd 30 North Colonnade, Canary Wharf London E14 5GN Supervisory Analyst Myriam Affri Senior Director +44 20 3530 1919 Committee Chairperson Peter Archbold, CFA Senior Director +44 20 3530 1172 Summary of Financial Statement Adjustments - - A multiple of 8x was used for operating leases -EUR40 million in cash outflows associated with pension contributions deducted from operating cash flow annually Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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