London, 09 July 2019 -- Moody's Investors Service ("Moody's") today assigned
a Ba3 corporate family rating (CFR) and a Ba3-PD probability of
default rating (PDR) to INEOS Enterprises Holdings Limited ("INEOS
Enterprises"). Concurrently, Moody's assigned Ba3 ratings
to the €350 million (or its US dollar equivalent) senior secured
term loan A ("TLA") due 2024 and €525 million senior
secured term loan B ("EUR TLB") due 2026 to be borrowed by
INEOS Enterprises Holdings II Limited, as well as to the US dollar-denominated
€525 million equivalent senior secured term loan B ("USD TLB")
due 2026 to be borrowed by INEOS Enterprises Holdings US Finco LLC.
The outlook on all ratings is stable.
The new ratings were assigned in the context of INEOS Enterprises's
proposed refinancing that seeks to establish a long term capital structure
for the group and finance the $1.1 billion acquisition of
Ashland LLC (Ba2 stable)'s composites and BDO businesses.
INEOS Enterprises's capital structure will include (i) shareholder
loans of approximately €536 million (treated as 100% equity
under Hybrid Equity Credit, Cross-Sector Rating Methodology),
(ii) senior secured credit facilities in an aggregate amount of €1.4
billion and (iii) a €300 million securitisation facility with a three
year rolling tenor (expected to be undrawn at close of the transaction).
RATINGS RATIONALE
The Ba3 corporate family rating (CFR) reflects the robust business profile
of INEOS Enterprises, which despite the moderate scale of its overall
revenue base, benefits from leading positions in many of the markets,
in which it operates, and a high degree of product and end-market
diversification. INEOS Enterprises also exhibits a balanced geographical
profile in terms of manufacturing assets and sales that are evenly spread
between the EMEA region and the Americas, albeit with a limited
presence in the fast growing Asia Pacific region.
The $700 million acquisition of the Ashtabula plant from Tronox
Limited (B1 positive) completed in April 2019, positions INEOS Enterprises
as North America's second largest producer of titanium dioxide (TiO2)
and derivatives with a 14% share of nameplate capacity.
The group will inherit a portfolio of unique, IP protected and cost
advantaged TiO2 grades, which account for the bulk of Ashtabula's
production, and command pricing premia relative to market benchmark
prices.
While the majority of the volumes and revenues generated by the composites
business acquired from Ashland is accounted for by low margin unsaturated
polyester resins (UPR), the deal will also give INEOS Enterprises
a portfolio of highly customised, patented epoxy vinyl ester resin
(VER) and Gelcoat products. Accounting for about a third of the
division's revenues and half of its EBITDA, these products
are sold under well-established brands and yield robust EBITDA
margins. In addition, INEOS Enterprises will hold leading
market positions in North America and Western Europe for a range of more
commodity-like products, such as oxygenated solvents,
butanediol and various other chemical intermediates.
Moody's notes that the group's competitive position is underpinned
by a well invested manufacturing asset base, as well as various
proprietary technologies and processes. Several businesses including
TiO2, composites and sulphur dioxide benefit from intellectual property
protection and access to cost advantaged feedstocks.
In addition, INEOS Enterprises will enjoy a stable and well diversified
customer base across its different businesses, as evidenced by the
long standing relationships established with many of its key customers
and high retention rates. Its top ten customers account for 15%
of total revenues, with the two largest each representing about
4% of group revenues.
Moody's notes that the group's overall operating profitability
is relatively modest, albeit more diversified, compared to
other chemical producers with a revenue base of similar scale.
On a pro-forma basis, INEOS Enterprises reported an average
EBITDA margin of 13% in the period 2016-2018. Setting
aside the effect of temporary price spikes caused by supply disruptions
in markets such as oxygenated solvents and purified isophthalic acid,
Moody's estimates that approximately 60% of the group sales
yield EBITDA margins in mid to high single digits.
However, Moody's expects that the group's underlying
profitability will benefit in coming years from synergies arising in areas
such as feedstock procurement from the integration of the recent and pending
acquisitions within the INEOS group, as well as fixed cost savings.
The fixed cost savings target set out to be attained by 2023 looks achievable
given INEOS's strong operating efficiency track-record.
While some of INEOS Enterprises's key products such as TiO2 and
butanediol have, in the past, been affected by market imbalances
resulting from significant oversupply, its main markets are expected
to see limited capacity additions in the near to medium term. Together
with the ability the group demonstrated in recent years, to pass
raw material cost increases to customers, this should help underpin
its unit contribution margins and overall EBITDA generation. It
remains that any softening in product demand resulting from weaker economic
conditions may create market imbalances leading to downward margin pressures.
In this context, Moody's considers that the portfolio effect
afforded by the diversified business profile of INEOS Enterprises should
underpin the resilience of its EBITDA and operating cash flow generation.
Combined with relatively low capital expenditure requirements reflecting
the group's well maintained asset base and a modest expected dividend
pay-out of €25 million p.a., Moody's
expects that the group will consistently generate positive free cash flow
(FCF) in coming years, under a range of scenarios.
While Moody's estimates that adjusted total debt to EBITDA will
be close to 4.5x at year-end 2019, on a pro-forma
full year basis, it expects that post closing INEOS Enterprises
will take the opportunity to use any excess cash to cut debt. This
should enable it to reduce debt over time in line with its medium-term
target of keeping unadjusted leverage below 3.0x through the cycle.
LIQUIDITY
INEOS Enterprises's liquidity position is adequate. Moody's
estimates that immediately post closing of the transaction, the
group will have cash balances of around €125 million. In addition,
it will have access to a €300 million securitisation facility collateralised
by trade receivables that will be fully undrawn and have a tenor of three
years on a rolling basis.
Looking ahead, Moody's expects the group to generate sufficient
FCF to meet scheduled term loan amortisations. The €350 million
TLA will amortise at a rate of 15% p.a., while
the US dollar tranche of TLB in an amount equivalent to €525 million
will amortise at a rate of 1% p.a.
The new senior secured term loans are covenant-lite, with
the exception of a net total leverage covenant which only applies to TLA
and for which Moody's expects INEOS Enterprises to maintain comfortable
headroom.
STRUCTURAL CONSIDERATIONS
The Ba3 ratings assigned to the TLA and TLB of INEOS Enterprises Holdings
II Limited and INEOS Enterprises Holdings US Finco LLC reflects the fact
that both loans are senior secured obligations of the borrowers,
rank pari passu with each other and benefit, to the extent legally
possible, from the same first ranking guarantees from all material
subsidiaries representing at least 85% of the restricted group's
consolidated EBITDA and assets.
RATING OUTLOOK
The stable outlook reflects Moody's expectation that following its
recent acquisitions, INEOS Enterprises will use its free cash flow
after capex and dividends (FCF) to cut debt and bring adjusted total and
net debt to EBITDA close to 4x and 3.5x respectively by year-end
2020.
WHAT COULD CHANGE THE RATING UP
While unlikely at this juncture, positive pressure on the rating
may arise over time should INEOS Enterprises demonstrate the ability to
sustain an EBITDA margin in the mid-to high teens and reduce debt
permanently so that Moody's adjusted total debt to EBITDA does not
exceed 3.0x and FCF to total debt remains above 10% at any
time through the cycle.
WHAT COULD CHANGE THE RATING DOWN
Conversely, the ratings could come under downward pressure,
should INEOS Enterprises' operating results fall short of our expectations
and FCF generation materially decline, preventing the group from
keeping Moody's adjusted total debt to EBITDA not materially higher
than 4x through the cycle.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Chemical Industry
published in March 2019. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
Headquartered in the UK, INEOS Enterprises is a leading producer
of intermediary chemicals with strong manufacturing platforms in Europe
and North America, operating fourteen sites in each of the two regions.
On a full year pro-forma basis, INEOS Enterprises reported
EBITDA of €333 million on revenues of €2.4 billion in
2018.
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.
Francois Lauras
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
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
