INEOS’ covenant waiver request causes concern

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INEOS is the world’s 3rd largest chemicals company. Its €7.29bn debt burden ($9.2bn) means that it is also Europe’s largest issuer of high yield debt. This is an unfortunate combination, given today’s chemical markets.

Last month, INEOS was forced to ask its lenders for a waiver on its debt covenants. It offered to pay a 0.5% upfront fee for the waiver, plus an ongoing fee of up to 1.25%. Its lead bankers, Barclays and Merrill Lynch, offered their support immediately, but other investors have been cautious.

Bloomberg reports that INEOS has a number of US lenders, and says these are used to receiving much higher fees in return for covenant waivers. S&P data shows US companies paid an average 2.40% so far this year. And according to Reuters, “the markets’ reaction shows that investors remain unconvinced that the company will be able to solve its problems by the end of May and avoid a full balance sheet restructuring”.

Reuters adds that investors’ concerns are also shown by the fact that insurers have recently required payments of “€7m upfront to protect €10m of the company’s debt against default”. INEOS senior debt has been trading around 50% of face value, whilst its junior debt has traded below 20% of face value.

INEOS has warned of an expected €400m loss on inventory write-down, if oil is $60/bbl at year-end. It announced a management restructuring of its European Olefins and Polymers businesses, and is taking a number of measures to reduce costs and improve working capital. John Reece, INEOS CFO, has also reassured investors that “the Group as a whole can produce significant profits and cash flows even at the bottom of the cycle”.

Decision-time for the 233 members of INEOS’s banking syndicate is 9 December, when the waiver request is likely to receive majority approval. Reports suggest, however, that the company may well have to pay an extra 0.5% in fees.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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