NOTE: On January 12, 2021, the press release was corrected as follows: The fifth sentence of the first paragraph of the press release was changed to: “The rating outlook assigned is Negative for INEOS US Petrochem LLC and INEOS 226 Limited and is changed to Negative from Rating Under Review for INEOS Quattro Holdings Ltd, INEOS Styrolution Group GmbH and Ineos Styrolution US Holding LLC.” Revised release follows.
London, 11 January 2021 -- Moody's Investors Service, ("Moody's") has
today downgraded the corporate family rating of INEOS Quattro Holdings
Ltd ("INEOS Quattro", formerly known as INEOS Styrolution Holding
Limited) to Ba3 from Ba2. Moody's has also downgraded INEOS Quattro's
probability of default rating to Ba3-PD from Ba2-PD.
The agency further confirmed at Ba2 ratings assigned to INEOS Styrolution
Group GmbH's and INEOS Styrolution US Holding LLC's senior secured Term
Loan B facilities due January 2027, as well as the Ba2 rating assigned
to the €600 million senior secured notes due January 2027 issued
by INEOS Styrolution Group GmbH. Further, Moody's assigned
a rating of Ba2 to the senior secured term loan B currently being marketed
by INEOS Quattro, as well as the revolving credit facility (RCF)
and term loan A facilities. The rating outlook assigned is Negative for INEOS US Petrochem LLC and INEOS 226 Limited and is changed to Negative from Rating Under Review for INEOS Quattro Holdings Ltd, INEOS Styrolution Group GmbH and Ineos Styrolution US Holding LLC. This rating action
concludes Moody's review for downgrade initiated on 1 July 2020
of INEOS Quattro's ratings following the company's planned acquisition
of the petrochemical assets of BP p.l.c. (A1 negative).
On 31 December 2020, INEOS Quattro (formerly INEOS Styrolution)
completed its acquisition of INOVYN, a sister company with common
ownership, as well as its acquisition of certain assets of BP p.l.c.
(BP, A1 negative). Upon completion of the refinancing contemplated
in connection with this transaction, Moody's expects to withdraw
all ratings and the outlooks of INOVYN Limited and its subsidiaries.
The transaction was originally announced in June 2020 including a purchase
consideration of $5 billion.
RATINGS RATIONALE
The Ba3 corporate family rating reflects the large size and scope of INEOS
Quattro with top market positions globally in a variety of chemical products,
its diverse product lines and end markets, a track record of successful
acquisition integration by the INEOS Group coupled with a history of consistently
exceeding initial synergy expectations. The rating further considers
the company's publicly stated financial policy and Moody's
expectations of moderating leverage -- particularly if the
recent recovery in trading is sustained.
Counterbalancing these strengths, the rating also incorporates significant
uncertainty related to the integration of the legacy and acquired businesses
that have limited vertical integration, material underperformance
in the aromatics business in the wake of coronavirus, expectations
of $150 million in synergies (primarily fixed costs) which are
yet to be realized, as well as a history of significant risk appetite
across the broader INEOS Group and the limited available disclosure regarding
the larger INEOS Group outside of the rated entities.
The transaction will create a globally scaled company with attractive
market positions in a number of sectors, as well as provide a measure
of backward integration. The new entity will benefit from the global
leadership positions in styrenics including polystyrene, ABS and
specialties, PVC and caustic soda, as well as paraxylene,
PTA and acetic acid. The combined company generated pro forma revenues
of €15 billion and EBITDA of €1.9 billion in 2019.
With 50 production facilities in 19 countries and over 5,000 customers,
the merged company is positioned to be among the larger players in the
industry. In addition, Styrolution's production of
styrene monomer will benefit from access to benzene from BP's aromatics
business.
The combined entity will further benefit from geographic and product diversity,
good safety track record and flexible cost structure. In 2019,
EMEA contributed about half of pro-forma EBITDA while US and Asia
each contributed about a quarter to the combined business. The
company's end markets include electronics, healthcare,
automotive, household, construction and packaging, as
well as industrial applications ranging from coatings to textiles which
makes the overall business relatively resilient. Positively,
there has been improvement in the automotive sector demand in the second
half of 2020; however, some of the textile applications have
weakened which negatively impacted the aromatics business.
Both Styrolution and INOVYN have long-serving and experienced management
with a mostly positive track record of integrating acquisitions and delivering
on synergy targets which bodes well for the proposed transaction and mitigates
a measure of execution risk. Still, recent weakness in the
performance of aromatics business will require close attention from INEOS
Quattro's management. The company indicated that it expected
to achieve $150 million of primarily fixed cost synergies and Moody's
views these as a realistic target.
Following weakened performance in the second quarter of 2020 owing to
coronavirus pandemic, the chemical industry has demonstrated a measure
of recovery in the second half of 2020 which Moody's expects to
continue into 2021. INEOS Styrolution reported a slight increase
in both its historical cost and replacement cost EBITDA in the third quarter
of 2020 driven by strong polystyrene and ABS demand, although slightly
offset by softer demand for styrene. INOVYN reported strong demand
for GP-PVC counterbalanced by weakness in caustic soda pricing
leading to only a slight EBITDA decline for the quarter. Moody's
understands that both INEOS Styrolution and INOVYN have continued to achieve
strong performance through the end of 2020 and expect to post robust results
in the fourth quarter. Conversely, the performance of BP's
aromatics assets lagged owing to the reduced demand for fibre amid global
pandemic and widespread lockdowns. Acetyls' good performance
was buoyed by good demand from Asia.
Whilst Moody's expects INEOS Quattro to achieve a measure of de-leveraging
over the next 12-24 months as the industry recovers and synergies
are realized such that its gross leverage measured as debt/EBITDA remains
sustainable below 4.5x (including Moody's standard adjustments),
the rating agency calculates pro-forma Moody's adjusted leverage,
excluding synergies, as at year end 2020 to be in excess of 5x which
it considers high for the rating category. Positively, the
company is expected to generate strong operating cash flow which should
help deleveraging, although the business also has material capital
expenditure requirements that will need to be funded. INEOS Quattro
has a clearly stated financial policy of maintaining net leverage below
3.0x through the cycle. Whilst Moody's expects the
combined company to follow this policy and manage its dividend distributions
accordingly, it also notes that rated INEOS entities have paid higher
dividends in the past 12-18 months than historically.
ESG Considerations
Soil, water and air pollution regulations continue to represent
the key environmental risks to the chemical sector, with petrochemical
companies particularly exposed to carbon emission regulations.
The packaging sector is the largest end market for polystyrene.
This is a sector that is under pressure from both regulations and changing
consumer behavior around single-use plastics.
Moody's regards the coronavirus outbreak as a social risk under
its ESG framework, given the substantial implications for public
health and safety. Still, INEOS Quattro businesses were able
to continue operating owing to their vital importance to the value chain.
Apart from disruptions related to coronavirus, health and safety
risks will remain very high for the chemical sector due to the handling
of hazardous materials during production, storage and transportation.
INEOS Styrolution and INOVYN Limited are private companies that are part
of the INEOS family of companies ultimately 100% owned by James
Ratcliffe (61.8%), Andrew Currie (19.2%)
and John Reece (19.0%), 95% of which is held
through INEOS Limited. Despite their private status, the
companies benefit from better transparency and more clearly defined financial
policy than a number of sponsor-owned peers, and Moody's
expects the new entity to be managed in the same manner. INEOS
targets net leverage of below 3.0x through the cycle to which Moody's
expects INEOS Quattro to adhere.
Liquidity
Moody's expects the new group's liquidity to be adequate with
over €300 million of cash, an undrawn $300 million revolving
credit facility at closing and combined undrawn asset securitization programs
of almost €700 million We also anticipate the company's operating
cash flows will be sufficient to cover its substantial planned capital
expenditure program of slightly over €2.0 billion over the
next three years, although it could be scaled back to some extent.
The only near term maturities are the securitization programs which expire
during 2021, although Moody's expects these to be extended
and potentially upsized prior to expiry. The new RCF and term loan
A facilities contain a net leverage covenant that tightens over time.
Structural Considerations
The senior secured debt of INEOS Quattro is rated Ba2 one notch above
its corporate family rating of Ba3 in line with Moody's Loss Given
Default model assuming a standard 50% recovery rate. The
senior secured instruments are pari passu and benefit from subsidiary
guarantees comprising 85% of EBITDA. The collateral includes
substantially all assets of the company including cash, bank accounts,
inventories and PP&E but excluding receivables that are pledged to
asset securitization programs.
RATING OUTLOOK
The negative rating outlook reflects the high leverage for the rating
category, the uncertain macroeconomic climate and the execution
risk that INEOS Quattro will successfully integrate its acquired businesses
and achieve or exceed its target synergies while gradually reducing leverage
towards its stated financial policy target. The rating could be
stabilized if Moody's-adjusted leverage moves sustainably
towards or below 4.5x and the integration of the businesses proceeds
as planned.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Whilst unlikely in the near term, positive rating pressure would
occur from successful integration of the acquired businesses, achieving
synergy targets and reducing leverage to well below 4.0x on a sustained
basis while generating positive free cash-flow and maintaining
good liquidity at all times.
Conversely, negative rating pressure could occur from failure to
integrate the businesses and realized synergies as outlined such that
leverage remains above 4.5x on a sustained basis. Any material
deterioration in liquidity or dividend payments could also cause negative
rating pressure.
LIST OF AFFECTED RATINGS
Assignments:
..Issuer: INEOS 226 Limited
....BACKED Senior Secured Bank Credit Facility,
Assigned Ba2
..Issuer: INEOS US Petrochem LLC
....BACKED Senior Secured Bank Credit Facility,
Assigned Ba2
Confirmations, previously placed on review for downgrade:
..Issuer: INEOS Styrolution Group GmbH
....Senior Secured Bank Credit Facility,
Confirmed at Ba2
....Senior Secured Regular Bond/Debenture,
Confirmed at Ba2
..Issuer: Ineos Styrolution US Holding LLC
....Senior Secured Bank Credit Facility,
Confirmed at Ba2
Downgrades, previously placed on review for downgrade::
..Issuer: INEOS Quattro Holdings Ltd
....Corporate Family Rating, Downgraded
to Ba3 from Ba2
....Probability of Default Rating, Downgraded
to Ba3-PD from Ba2-PD
Outlook Actions:
..Issuer: INEOS Quattro Holdings Ltd
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: INEOS 226 Limited
....Outlook, Assigned Negative
..Issuer: INEOS Styrolution Group GmbH
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Ineos Styrolution US Holding LLC
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: INEOS US Petrochem LLC
....Outlook, Assigned Negative
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.
COMPANY PROFILE
INEOS Quattro Holdings Limited is an indirect wholly-owned subsidiary
of INEOS AG formed in January 2021 through a merger of INEOS Styrolution
Holdings Limited and INOVYN together with aromatics and acetyls petrochemical
assets acquired from BP plc. INEOS Quattro is a globally diversified
chemical company with leadership market positions in a wide range of chemicals
with broad market applications such as polystyrene, vinyls and caustic
soda, paraxylene, PTA, acetic acid and acetate derivatives.
On a pro-forma basis, businesses comprising INEOS Quattro
generated revenues of €15 billion and EBITDA of €1.9
billion in 2019.
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.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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
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Client Service: 44 20 7772 5454
Peter Firth
Associate Managing Director
Corporate Finance Group
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Client Service: 44 20 7772 5454
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