Reprieve, but Ineos is still toxic

May 29, 2009

REUTERS– Neil Collins is a Reuters columnist. The views expressed are his own –

Ineos Group, popularly described as Britain’s largest private company, has escaped the hangman’s noose again. For the second time, a sufficient majority of the 230 banks to which it owes 7.5 billion euros have granted it a stay of execution.

Last month, the 7.875 percent 2016 bond was trading at 7 percent of face value, but since then the price has jumped to 28. Its other debt has also risen strongly.

The business may be a sprawling ragbag of chemical plants which (literally) produce toxic assets like chlorine, but it’s a profitable ragbag, and the new buyers of the debt can afford to take a more pragmatic view of the company’s five-year recovery plan than those banks which have yet to admit they have lost much of their money.

Ineos was built on debt. Its chairman, Jim Ratcliffe, looks like the commercial equivalent of the home-buyer with a 100 percent mortgage. Indeed, the terms of the purchase in 2001 of the UK’s only significant chlorine plant in Runcorn, Cheshire, looked more like those 120 percent mortgages that Northern Rock used to offer.

The plant was part of a “325 million pound deal”, but in effect Ineos was paid to take it off ICI’s hands. Even that failed to stop the buyer demanding 65 million pounds in compensation because the plant was so ropey, and in almost the same breath applying for further millions in state aid to keep it open.

Nevertheless, the Ineos expansion continued unabated. Its self-styled “transformational acquisition” was the purchase in 2006 of BP’s petrochemicals business, based in Grangemouth in the north of England. The 5.1 billion pounds purchase price was almost all borrowed.

It quadrupled the company’s revenues, and brought in the bulk of today’s bank creditors who are now on the rack. It is barely five months since they agreed to a covenant waiver, in exchange for a fee and a 150-basis-point rise in the cost of the debt.

Earlier this month Ineos revealed that it was budgeting for revenues of 15.2 billion euros, to generate 1.1 billion euros of EBITDA (earnings before interest, tax, depreciation and amortisation) on current cost accounting.

This is nothing like enough to support 7.5 billion of debt. However, if enough of the debt-holders have bought their stock cheaply, a reconstruction might cut that in half, and leave them with better-rated paper which could stand closer to par.

As for Ratcliffe himself, he has managed to retain a majority stake in the huge group he has built in just 11 years. He will need all his well-honed negotiating skills to hang onto it.

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