INSIGHT: INEOS continues to work on debt plan

15 June 2009 17:18  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--INEOS is expected to put forward a new business plan to its principal lenders within weeks as the 17 July end to its debt covenant waiver extension nears.

This date is an extension of an earlier deadline to the end of May, agreed with the banks in December when it became clear that the company might breach certain debt covenants.

INEOS continues to chart a course through extremely difficult times.

The collapse in the chemicals business late last year, coupled with the sharp drop in the oil price, helped drive replacement cost earnings before interest, tax, depreciation and amortisation (EBITDA) for 2008 down to €1.6bn ($2.3bn).

The INEOS businesses were under pressure, particularly in the fourth quarter, but it was inventory holding losses of €845m for the year, compared with holding gains of €244m in 2007 that highlighted the swing in fortunes.

Those losses, taken into account as the oil price plunged from its $147/bbl high and refined products and chemicals prices dropped sharply, coupled with hurricane and strike-related costs, prompted the management forecast in November that the group might breach some if its financial covenants.

INEOS obtained a waiver from its senior banking syndicate of its debt service cover and interest cover tests together with an amendment to its leverage test for the period to the end of December 2008, although the leverage test was met. Its principal lenders also agreed to defer the interest cover and leverage tests for the period to 31 March 2009 until 31 May 2009.

The deferral, on this particularly difficult period for the company and most of its peers, was further extended to 17 July 2009.

Industry data suggest that the first quarter of 2009 was tough in most segments and that the downturn, in Europe particularly, was more keenly and widely felt.

In its just released annual report, INEOS says that the petrochemicals market expects to see lower volumes and margins during 2009, as demand remains depressed in the recessionary economic environment.

“Some recovery is expected as the year progresses and demand shows signs of slow but steady improvement,” the company adds in a document finalised at the end of May.

“The refining market expects to see a softening of the trading environment in 2009 following the global economic downturn.”

The INEOS Group Holding pre-tax loss in 2008 was €1.0bn against a profit of €470.1m in 2007 on a turnover up 8.8% at €30.3bn.

EBITDA for its olefins and polymers business in North America were down 89.2% at €26.2m. O&P Europe EBITDA were 80.7% lower at €101.4m.

Refining business EBITDA slumped 90.0% to €43.4m while chemical intermediates profits were more robust falling 58.8% to €422.5m.

Management said in May that it expected first quarter historical cost EBITDA of €200m after accounting for an inventory holding gain of €30m. It reported tough first quarter trading conditions but some slight improvement towards the end of the quarter driven partly by increased demand from Asia.

Replacement cost EBITDA for the period was €170m and in March in the region of €73m, according to the company which forecast full year 2009 RC EBITDA of €1.1bn.

A business plan to the end of December 2012 has been reviewed by its advisers Pricewaterhouse Coopers and is being discussed with its senior banking syndicate.

On the positive side, the company is relatively broad based and is cash generative. It is said to be responding well to the current global economy and on the way to achieving fixed cost savings of €200m in 2009. Capital spending has been reduced by a significant €300m and inventories reduced across the group by some 20%.

But the longer markets remain depressed, the tougher it is likely to be and while an agreement on new interest cover and leverage tests is desirable by 17 July a further extension could be sought.

The trouble then, however, in order to accommodate the company further, costs will have to rise.

The industry outlook is not bright, to say the least, particularly with new olefins and polyolefins capacities in the Middle East likely to depress markets for those products further.

CMAI reiterated last week that it does not expect much in the way of an upturn for the sector until well into 2010 and maybe later. Slow conditions will continue while capacity and demand are out of sync.

These are tough times for chemicals and tough times to be negotiating debt metrics. It’s not easy to see too far ahead.

($1 = €0.71)

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By: Nigel Davis
+44 20 8652 3214

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