INSIGHT: INEOS, banks feel their way in downturn

10 December 2008 16:52  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Dow Chemical CEO Andrew Liveris this week talked about his board operating on “code red” since October.

By now, every chemical company must be running on a heightened level of readiness. Plants have been turned down, or shut off completely, in the face of the steep drop in downstream demand. But they may need to be turned on again quickly should conditions change. Yet there is little or no “visibility” in the markets.

Prices continue to fall and, as has been suggested already over the past couple of months, more stable operating conditions are not expected until the first quarter of next year.

It is not just the chemicals players that understand this. The banks do as well.

INEOS on Tuesday said it had successfully negotiated debt covenant waivers with its 230 lenders. The deals have been struck over the past 16 days but, not surprisingly, at a price.

INEOS has offered to pay a more attractive margin over Libor (the London inter-bank offer rate) to its lenders and in return has secured a bit more “headroom” under is liquidity covenants.

These must be worse than “bottom of the cycle” conditions, and in the current circumstance companies need to be closely focused on costs and cash. The big questions, then, operationally, are whether to run or not.

INEOS said on 17 November that all its businesses were positioned to be profitable and cash generative at “normal” bottom-of-cycle conditions and the point was made again on Tuesday by CFO John Reece.

“We are pleased that senior debt-holders have endorsed our pro-active steps to address the exceptional trading conditions,” he said.

“The result highlights the long-term support that exists for the company and its management team. While our focus now is on trading through the near-term market conditions expected in Q1, we remain well positioned in the long-term due to our portfolio of businesses, all of which are capable of trading through normal bottom-of-the-cycle conditions."

INEOS says it has taken actions to optimise the defensive qualities of the business overall, including a further €200m ($258m) of annualised cost savings; a steep reduction on capital spending for 2009, to €250m from €600m in 2008; and steps to improve working capital performance.

The company also expected liquidity to remain good as lower prices eventually lead to an unwinding of working capital.

Operating conditions have changed rapidly and the sector is in the midst of a slump. Shutdowns now expose the raw edge of the recession and the sector is not helped by the seemingly ongoing reduction in the oil price.

INEOS is banking on there being greater visibility at the end of the first quarter of 2009. By that time costly inventories will have been worked through the system. Quarterly contracts, such as that for ethylene in Europe, will have normalised. And one might expect more reasonable price spreads down important petrochemicals chains.

From the bottom of the cycle chemical producers may not be able to look up, but they should be able to look forward.

INEOS is drawing up a new five-year business plan with the help of industry consultants, which it will present to its banks after the end of the first quarter. Once completed, it expects to have the plan looked over by business advisers PricewaterhouseCoopers.

The fact that it has successfully negotiated a two-quarter breathing space in which the fundamentals of the business can be reassessed says a great deal.

The company and its investors are feeling their way in uncertain times. The new deal with its banks will cost the company, but not excessively, given the recent sharp downward movement of interbank rates.

INEOS rests on a broad base with olefins and polyolefins assets in North America and Europe as well as an extensive intermediates portfolio. It has oil refineries in the UK and France. The company says it can save an additional €60m in the fourth quarter and achieve the projected annual savings of €200m by the end of 2009.

It is not sailing alone through extremely difficult waters; a fact that is widely recognised not just in chemicals and oil.

($1 = €0.77)

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By: Nigel Davis
+44 20 8652 3214

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