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Rating Action:

Moody's affirms INEOS Group CFR at Ba3; outlook remains negative

19 Oct 2020

London, 19 October 2020 -- Moody's Investors Service ("Moody's") today affirmed Ineos Group Holdings S.A. (INEOS) corporate family rating (CFR) at Ba3 and probability of default rating (PDR) at Ba3-PD. Concurrently, Moody's affirmed the ratings of Ineos US Finance LLC's and Ineos Finance plc's senior secured term loan facilities due March 2024 and Ineos Finance plc's senior secured notes due November 2025 and May 2026 at Ba2, together with the €700 million add-on debt consisting of senior secured term loan and other secured debt currently being marketed. Further, Moody's affirmed the B2 ratings on INEOS' senior unsecured notes due 2024. The rating outlook on all three entities remains negative.

RATINGS RATIONALE

Today's action reflects Moody's expectations that INEOS's large and diversified business with many leading market positions will gradually recover in 2021-2022 following the weak, bottom-of-the-cycle performance in 2020 in the wake of coronavirus and the broad-based reduction in demand for its largely commoditized product offerings. Moody's also expects that INEOS's currently highly elevated leverage (projected to be over 6.0x in 2020) will reduce over time closer to its historical levels. The agency also notes that INEOS's expected dividend of up to €300 million to be paid in 2021 from the proceeds of the current offering is a credit negative, and this, together with the high leverage, leaves the company little cushion within the rating category.

INEOS experienced a 22% decline in revenues and a 48% reduction in EBITDA in the first half of 2020 as a result of the demand retrenchment in the wake of coronavirus primarily on the back of decreases in prices of its goods. Although INEOS saw good demand for certain food and packaging applications, it was offset by underperformance in other verticals, such as construction and autos. The company's leverage measured as debt/EBITDA increased to 5.9x for the twelve months ended 30 June 2020 from 4.6x in 2019 and Moody's anticipates its leverage to rise above 6.0x in 2020, in excess of the agency's previous expectations, before reducing in 2021.

Despite increased leverage, the company's operations are highly cash generative and are expected to produce over €1 billion in funds from operations in each of the next three years. Still, owing to INEOS' large capital commitments (although reduced in the wake of coronavirus), its cash flow before dividends in 2020 and 2021 is expected to be neutral. While the anticipated dividend payout of up to €300 million in 2021 is not very large relative to the size of the company, it will push INEOS's free cash flow in that year into the negative territory. Moody's views this distribution as a sign of a continuing aggressive financial policy particularly following a dividend of over €2 billion paid by INEOS in 2019.

INEOS' ratings continue to be underpinned by the company's robust business profile, reflecting its (1) leading market position as one of the world's largest chemical groups across a number of key commodity chemicals; (2) vertically integrated business model, which ensures that the company can capture margins across the whole value chain and benefit from economies of scale; and (3) well-invested production facilities, with most of them ranking in the first or second quartile on the regional industry cost curve. The rating also reflects the cyclicality of commodity chemical markets and the group's exposure to volatile raw material prices.

LIQUIDITY

INEOS's liquidity position is adequate. At 30 June 2020, the group held cash balances of approximately €927 million. In addition, it has currently around €125 million available under its €800 million receivables securitisation facility, which matures in December 2022. The company does not have other bank facilities such as an RCF in place. Furthermore, Moody's expects that management's actions to conserve cash, lower tax payments and a working capital inflow from lower feedstock prices will further shore up INEOS' liquidity, along with the portion of the proceeds of the add-on offering slated to be retained by the company.

STRUCTURAL CONSIDERATIONS

Applying our Loss Given Default for Speculative-Grade Companies rating methodology (assuming a standard 50% recovery rate), the group's outstanding rated debt instruments fall into two main categories: (1) senior secured term loans due 2024 and senior secured notes due in 2025 and 2026 which are rated Ba2, one notch above the Ba3 CFR because of their ranking priority; and (2) unsecured notes due in 2024 which are rated B2, two notches below the Ba3 CFR, reflecting their subordinated ranking in the capital structure.

RATING OUTLOOK

The negative outlook reflects our expectation that significant pressure on operating profitability will leave INEOS's leverage metrics weakly positioned at year-end 2020 relative to our guidance for the Ba3 rating, including Moody's-adjusted total debt to EBITDA not exceeding 5.0x.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

While unlikely at this juncture, positive pressure on the rating may arise over time if (i) retained cash flow to debt is consistently above 20%; (ii) Moody's-adjusted total debt to EBITDA is sustained below 4x; and (iii) INEOS maintains good liquidity and adopts a more consistently conservative financial policy.

Conversely, the ratings could come under downward pressure if (i) cyclical recovery fails to materialize in 2021; (ii) Moody's-adjusted total debt to EBITDA keeps over 5x and retained cash flow to debt below 15% for a prolonged period of time; (iii) the group's liquidity profile weakens; or (iv) INEOS chooses to make any further dividend distributions while its leverage levels are elevated.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, 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 $9 billion buy-out, transforming INEOS into one of the world's largest chemical companies (measured by turnover). In 2019, INEOS reported consolidated revenues of €13.7 billion and EBITDA before exceptionals of €1.9 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

Maria Maslovsky
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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