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Rating Action:

Moody's Upgrades Ineos to Ba3; stable outlook

03 Feb 2017

London, 03 February 2017 -- Moody's Investors Service, ("Moody's") has today upgraded Ineos Group Holdings S.A.'s (Ineos) Corporate Family Rating (CFR) to Ba3 from B1 and Probability of Default Rating (PDR) to Ba3-PD from B1-PD. Concurrently, Moody's has upgraded the ratings on Ineos' and its subsidiaries' debt instruments by one notch, to Ba2 from Ba3 and to B2 from B3, and has assigned provisional (P)Ba2 ratings to the proposed ca EUR1.2 billion equivalent of new secured term loans due 2024 and the proposed ca EUR3.3 billion equivalent of new secured term loans due 2022, borrowed by Ineos US Finance LLC and Ineos Finance Plc, both subsidiaries of Ineos. The outlook on all ratings is stable.

A full list of affected ratings is provided towards the end of this press release.

Moody's expects that Ineos will use the proceeds of the proposed new secured loan issuance due 2024 to redeem the ca EUR1.1 billion in outstanding senior unsecured notes maturing in 2019 (now rated B2). It also intends to fully repay the ca EUR1.2 billion equivalent secured term loan due 2018 with cash on balance sheet. The company has already issued conditional redemption notices with respect to all or part of these notes and it expects to redeem them on or about 28 February 2017. In addition, the company intends to reprice its existing EUR and USD denominated term loan tranches due 2022, totaling approximately EUR1.4 billion. In total Moody's expects these transactions will reduce the company's interest expense going forward to ca EUR240 million, a ca EUR100 million reduction, and reduce Moody's adjusted gross leverage by 0.5x from 3.7x to 3.2x for the twelve months to September 2016.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the facilities. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

"The upgrade reflects Ineos' very strong top of cycle operating performance in 2015 and 2016, that Moody's expects to remain robust in the next 12 months and further support positive free cash flow generation," said Moody's analyst Douglas Crawford. "This has driven the substantial decrease in Moody's adjusted gross leverage to 3.2x for the twelve months to September 2016 pro forma the proposed refinancing from 4.8x in FY2014, with the proposed ca EUR1.2 billion debt payment contributing a 0.5x reduction."

Ineos' Ba3 CFR primarily reflects the group's: (1) position as one of the world's largest chemical groups, enjoying leading market positions across a number of key commodity chemicals; (2) vertically integrated business model, which ensures Ineos can capture margins across the value chain, whilst benefitting from certainty of supply and economies of scale; (3) sustained operationally driven deleveraging trend over the last few years and recent active focus on reducing leverage demonstrated by the EUR1.2 billion debt payment, that is equivalent to ca 15% of reported debt; (4) well-invested production facilities, with Moody's estimation that the majority rank in the first or second quartiles on the regional industry cost curve; and (5) track record of generating positive free cash flows in most of the last five years, including ca EUR1 billion of free cash flow in both 2015 and 2016.

However, the rating also reflects the group's (1) exposure to weakening US margins in the next two or three years mostly due to expected new US capacity coming online from 2017; (2) inherent cyclicality and exposure to volatile raw material prices, which have historically led to volatile earnings over the cycle with Moody's expectation that current top of cycle margins normalise over the next three years; (3) estimated increase in leverage towards 4.0x during 2018 from 3.2x for the 12 months through September 2016 pro forma the debt payment on the back of deteriorating industry conditions; and (4) risk of mergers and acquisitions as well as further related party loans/transactions.

Ineos has benefitted from top of the cycle conditions in its olefins and polymers (O&P) divisions for much of 2015 and 2016, driving record reported EBITDA for the group of above EUR2 billion compared to EUR1.5 billion in 2013. The company has reported that 2016 EBITDA will be EUR2.3 billion, a 5% increase on 2015 levels, which itself was up 16% compared to 2014, with the gains driven by improvements in Europe. The 2016 performance was better than Moody's expectations as the rating agency had expected a 5% decline due to new North American capacity impacting the O&P division and new Middle Eastern oxide capacity impacting the Chemical Intermediates division.

O&P North America (41% of 2016 EBITDA) benefitted from top of the cycle (TOC) integrated polymer operating margins and high operating rates due to unexpected competitor outages, which led to higher demand for Ineos' ethylene and polyethylene. The division's EBITDA was flat in 2015 at record levels and down 6% in 2016, as it experienced margin compression in polyethylene and ethylene in the first half of the year. However, EBITDA margins increased to over 30% in both years compared to 27% in 2014. O&P Europe EBITDA (30% of 2016 EBITDA) more than doubled in 2015 and increased a further 23% in 2016. This was similarly attributed to strong polymer sales volumes backed by unplanned outages, but also to lower imports from abroad due to a strong USD, the acquisition of the 50% remaining stake in Ineos' Rafnes cracker, as well as lower inventory losses (EUR80 million less in 2015). Chemical Intermediates EBITDA (29% of 2016 EBITDA) was down 3% in 2015 but up 8% in 2016. The decline was mostly due to weak sales volumes and margins in the Nitriles business that has been suffering from an oversupplied market for the last few years, mitigated by strong margins in the Oxides and Oligomers businesses. Strong demand in the Oxide and Oligomers businesses drove the increase in the division's 2016 EBITDA, which also benefitted from an improvement in Nitriles and Phenol margins, which had previously been negatively impacted by a slowdown in China.

Going forward, Moody's expects Ineos' EBITDA to fall by approximately 10% in 2017, with a more pronounced decline in 2018. The rating agency expects the top of the cycle conditions in O&P in the US and Europe to normalise, especially during 2018 because competitors' investments in new ethylene and polyethylene capacities create an oversupplied market and margin reductions. Both the US cash margins that are currently in the high 30s cents and the European margins of ca EUR500/tonne are expected to decline, with a more rapid and pronounced decrease expected in the US to the low 20s cents by 2018/2019. However, these declines are not as substantial as previously expected by Moody's because several new US ethylene plants have been delayed. Additionally, phenol and nitriles margins in the Chemical Intermediates division are expected to improve from the bottom of the cycle conditions they have been in for some time.

In the twelve months to September 2016 (LTM), Ineos generated EUR1.9 billion in Moody's adjusted funds from operations, paid EUR785 million in adjusted capex and EUR73 million in dividends. The group's cash generation has substantially improved over the past few years with EUR1.1 billion of LTM Moody's-adjusted free cash flow (FCF) compared to EUR520 million in 2014 and only EUR44 million in 2012 as a result of the improvements in the operating performance of O&P Europe over the last few years. For the LTM adjusted retained cash flow/debt was 19% compared to 14% in 2014. Going forward, despite Moody's expectations of a decrease in operating performance, the rating agency still expects Ineos to generate significant positive free-cash flow in the next 12 months. Moody's expects adjusted capex of approximately EUR600 million in both 2017 and 2018 and FCF of approximately EUR800 million in 2017 falling to approximately EUR700 million in 2018.

Prior to the EUR1.2 billion debt repayment, Ineos' adjusted leverage was already low for its previous B1 rating. As of 30 September, Moody's adjusted debt was ca EUR9.3 billion (including adjustments of EUR669 million for pensions and EUR593 million for leases) , and its gross debt/EBITDA was 3.7x, down from 4.5x in 2015, due to EBITDA growth, and below our upgrade trigger of 4.5x. The rating upgrade to Ba3 reflects the company's proposed EUR1.2 billion debt payment that will reduce leverage by 0.5x and the rating agency's expectations for higher EBITDA in 2017 and 2018 than previously expected. As a result, Moody's expects Moody's adjusted gross leverage to be ca 3.6x in 2017 and rise towards 4.0x during 2018.

Assuming the use of EUR1.2 billion in cash to pay down debt, Moody's views Ineos' liquidity over the next 12-18 months as good. As of 31 December 2016, pro forma for the debt pay down, the company had EUR1.1 billion of cash on balance sheet and €250 million available under its €800 million securitization facility due in 2018. Moody's expects the company to generate free cash flow of approximately EUR800 million in 2017. Following the proposed refinancing, there will be no substantial debt maturities until 2022, apart from the EUR300 million drawings on the securitisation facility. There are no maintenance covenants and no revolving credit facility.

RATING OUTLOOK

The stable outlook incorporates Moody's expectations that current top of the cycle conditions for much of Ineos' businesses will turn down but that the company's credit metrics including leverage and retained cash flow will not worsen substantially and that its underlying chemical markets do not significantly deteriorate. It also assumes that Ineos will maintain good liquidity.

WHAT COULD CHANGE THE RATING UP/DOWN

Considering the recent rating action, Moody's does not expect any positive rating pressure in the near term. However, the rating could be upgraded if retained cash flow/debt is consistently around 25%, gross leverage is sustained below 3.5x through the cycle and gross debt materially reduced, it sustains materially positive free cash flow and the company develops a track record of a conservative financial policy. Conversely, the ratings could be downgraded if gross leverage rises over 5.0x, retained cash flow/debt is consistently less than 15% or liquidity deteriorates.

The following debt instrument ratings were assigned today, outlook stable:

Ineos Finance plc:

BACKED EUR GTD SR SEC TERM LOAN B due 2022, (P)Ba2

BACKED EUR GTD SR SEC TERM LOAN B due 2024, (P)Ba2

Ineos US Finance LLC:

BACKED USD GTD SR SEC TERM LOAN B due 2022, (P)Ba2

BACKED USD GTD SR SEC TERM LOAN B due 2024, (P)Ba2

The following ratings were upgraded one notch today, outlook stable:

Ineos Group Holdings S.A.:

LT CORPORATE FAMILY RATING, Upgraded to Ba3 from B1

PROBABILITY OF DEFAULT RATING, Upgraded to Ba3-PD from B1-PD

BACKED USD GTD SR GLOBAL NOTES due 2019, Upgraded to B2 from B3

BACKED EUR GTD SR GLOBAL NOTES due 2019, Upgraded to B2 from B3

BACKED USD GTD SR GLOBAL NOTES due 2024, Upgraded to B2 from B3

BACKED EUR GTD SR GLOBAL NOTES due 2024, Upgraded to B2 from B3

Ineos Finance plc:

BACKED EUR SR SEC TERM LOAN B due 2018, Upgraded to Ba2 from Ba3

EUR GTD SR SEC TERM LOAN B due 2020, Upgraded to Ba2 from Ba3

BACKED EUR GTD SR SEC GLOBAL NOTES due 2023, Upgraded to Ba2 from Ba3

Ineos US Finance LLC:

USD SR SEC TERM LOAN B due 2018, Upgraded to Ba2 from Ba3

USD GTD SR SEC TERM LOAN B due 2020, Upgraded to Ba2 from Ba3

BACKED USD SR SEC TERM LOAN due 2022, Upgraded to Ba2 from Ba3

BACKED EUR SR SEC TERM LOAN due 2022, Upgraded to Ba2 from Ba3

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Chemical Industry Rating Methodology published in December 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Ineos Group Holdings S.A. was established in 1998 via a management buy-out of the former BP petrochemicals asset in Antwerp, which was led by Mr. Ratcliffe, chairman of Ineos Group Holdings S.A. The group has subsequently grown through a series of acquisitions and at the end of 2005 acquired Innovene Inc., a 100% subsidiary of BP, in a USD9 billion buy-out, transforming Ineos into one of the world's largest chemical companies (measured by turnover). For the last twelve months ended September 2016 it reported revenues of EUR12 billion and EBITDA of EUR2.3 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Douglas Crawford
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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