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Rating Action:

Moody's changes outlook on Ineos's ratings to positive; assigns (P)B1 to new sen. sec. debt instruments

20 Apr 2012

London, 20 April 2012 -- Moody's Investors Service has today changed the outlook on all of Ineos's ratings to positive from stable. Concurrently, the rating agency has assigned a provisional B1 rating to the new senior secured notes maturing in 2020 and to the new cov-lite Term Loan B.

These provisional ratings on the new debt instruments reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign definitive ratings to the new notes and Term Loan B. A definitive rating may differ from a provisional rating.

In addition, subject to completion of the announced refinancing, Moody's would take the following actions on the existing debt:

a) The ratings on the existing senior secured notes would be downgraded to B1 from Ba3. This is to reflect their weaker recovery rate due to the increased amount of total senior secured debt, while the security/collateral package has remained substantially unchanged and the amount of junior debt has reduced following the refinancing of the second lien debt;

b) The ratings on the bank facilities refinanced in full would be withdrawn;

c) The existing senior unsecured notes would keep their current Caa1 rating, as it already takes into account their structurally and contractually subordinated position in the capital structure.

RATINGS RATIONALE

RATING RATIONALE -- POSITIVE OUTLOOK

Moody's decision to change Ineos's B2 corporate family rating outlook to positive reflects the expected improvement in the company's financial profile upon completion of the announced refinancing. Specifically, the refinancing addresses some of Moody's main concerns regarding the high vulnerability of Ineos's current capital structure in case of a downturn, especially given the tight financial covenants attached to all the outstanding bank facilities and the several other restrictive covenants that lenders imposed on Ineos during the recent severe recession.

Moody's expects that the refinancing will allow Ineos to (1) achieve a much higher degree of financial flexibility and (2) further improve its debt maturity profile:

1.) Enhanced financial flexibility would result from (a) the removal of maintenance financial covenants, which, if not met every quarter -- and in the absence of a lender's approved waiver -- could trigger an event of default and immediate repayment of all debt outstanding (including the notes, given the cross-default clauses); and (b) the removal of the current margin ratchet feature of Ineos's bank debt, which would lead to escalating funding costs in case of higher leverage ratios.

2.) The debt maturity profile would be extended further to Ineos's repayment in full of the bank revolver facility due in 2013, the term loan due in 2014 and the second-lien tranche due in 2015. Moody's says that these repayments would remove Ineos's refinancing risk in 2013 and 2014, and reduce it substantially in 2015, when the first senior secured notes become due. Moody's notes that these positive developments, whilst removing or materially reducing previous concerns, will allow Ineos's management to better focus on the further development of the core business strategy, which has in the past been partially constrained by several restrictive covenants of the senior facility agreement.

However, Moody's explains that the rating remains constrained by the high amount of Ineos's financial debt, both in absolute terms and relative to Ineos's EBITDA, and in spite of some material debt reduction already achieved in 2011 with the use of the cash proceeds resulting from the sale of 50% of the refining division to Petrochina to form a new joint venture. In particular, Moody's notes that financial debt will increase further as a result of the announced refinancing in view of Ineos's plans to replace the revolver facility with a cash overfund in excess of EUR600 million, to be created by issuing more debt than the amount that is strictly needed to refinance the outstanding bank facilities and cover transaction costs. The rating agency is concerned that this additional debt would result in much higher financial charges, thereby reducing the positive deleveraging impact of the Petrochina deal closed last year.

Nevertheless, the risks associated with Ineos's higher debt level, its higher associated costs and the removal of the revolver facility as a committed external source of liquidity, are more than adequately offset by the materially reduced refinancing risks over the coming years, as well as by the cash overfund mechanism, which would allow Ineos's liquidity to remain excellent even without the revolver facility. In particular, Moody's expects that the cash overfund created with the refinancing will have the same purpose as the revolver, i.e. to mainly fund working-capital-related swings and cash collateralisation of letters of credit and guarantees. At the same time, the advantage of the cash overfund over the revolver would be greater and more direct control over liquidity when urgently needed in a downturn, as opposed to the previous situation when Ineos had to pass strict financial covenants tests in order to be able to continuously use its revolver facility. Moody's believes that the size of the cash overfund, together with the continuous availability of the EUR1.2 billion under the outstanding securitisation facility (which will only expire in December 2014), will be more than adequate to address liquidity needs associated with working capital over the coming several quarters. At the same time, Ineos's ability to continue to generate robust operating cash flows will provide sufficient headroom to accommodate a more ambitious capital expenditures plan than in the past, especially considering several organic growth projects that Ineos intends to execute in 2012 and 2013. However, despite a possible material increase in capex over the coming quarters, Moody's believes that Ineos will continue to generate positive free cash flow and would retain sufficient flexibility to reduce or postpone capex, if this were needed to address an unforeseen deterioration in the operating environment leading to bottom-of-cycle profitability.

Moody's sees limited potential for the incremental improvement in the operating performance in the near term, given the better-than-anticipated results achieved in Q1 2012 after the difficult final quarter of 2011, and considering that the North American O&P division, which has been key to driving Ineos's profitability in the previous quarters, is already running at high utilisation rates and enjoying top-of-cycle margins.

WHAT COULD MOVE THE RATING UP/DOWN

Moody's would consider upgrading Ineos's rating in the event of a material reduction in the gross amount of debt, leading to an improved leverage, with a Net debt/EBITDA ratio below 4x. This would also imply the maintenance of a strong liquidity profile, with no or limited erosion in the cash buffer created via the refinancing. An upgrade of the rating would also require Ineos to display an Interest coverage ratio comfortably above 2.75x, and to display an RCF/Debt ratio above 10% on a sustained basis.

Negative rating pressure, although unlikely at this stage, could emerge in the event of the group suffering a material deterioration in operating performance, leading to (i) a sustained weakness in cash flow generation with RCF/Debt reduced to the low single digits; (ii) weaker debt coverage metrics with Net Debt/Leverage ratio above 5x. Moreover, the ratings could also come under negative pressure in the event of sustained negative free cash flow generation weakening the liquidity profile.

METHODOLOGY USED

The methodologies used in these ratings were Global Chemical Industry published in December 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Ineos Group Holdings S.A. ("Ineos" or the company) 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 SA. 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 USD 9 billion buy-out, transforming Ineos into one of the world's largest chemical companies (measured by turnover). In 2011, Ineos reported a turnover of Eur 17.6 billion and an EBITDA (excluding the discontinued refining division) of Eur 1.71 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

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

Information sources used to prepare each of the ratings are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Gianmarco Migliavacca
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
SUBSCRIBERS: 44 20 7772 5454

Olivier Beroud
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

Moody's changes outlook on Ineos's ratings to positive; assigns (P)B1 to new sen. sec. debt instruments
No Related Data.
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