DealZone

Carrying a heavy burden

July 16, 2009

Library photo of farmers carrying paddy stalks during a harvest at a field in Deli Serdang district of the Indonesia's North Sumatra province June 30, 2009. Indonesia's statistics bureau has projected 2009 unmilled rice output to rise 1.13 percent to 60.93 million tonnes, or the equivalent of around 38 million tonnes of milled rice. REUTERS/Y.T Haryono (INDONESIA AGRICULTURE FOOD) British petrochemicals giant Ineos today announced it has received the overwhelming support of its lenders for proposals to ease the terms on much of its 7.5 billion euro debt load.

The deal leaves the company’s debt burden untouched while lenders will accept a back-dated increase in interest payments as well as a one-off fee.

The company spent months preparing a new business plan and discussing options with lenders and financial advisers. They correctly predicted that lenders would have little appetite for a more severe restructuring, such as asking lenders to write off debts in exchange for an equity stake.

Instead, lenders accepted that Ineos could cope with its large debt load if it had the right business plan in place. Asset sales appear to be part of the equation, though the company has repeatedly stated it is under no time pressure to make such sales.

Time will tell whether this works out for Ineos but many restructuring experts worry that lender aversion to writing off debts means companies are being left with excessive debt burdens, even after a round of restructuring.

This was a consistent theme in the recent restructuring of French building materials firm Monier, left with around 1 billion euros of debt.

Much depends on the pace of the recovery, as well as the ability of management to operate in difficult trading conditions and buyers returning to pick up unwanted assets.

If these do not happen trouble may lay ahead: Europe could end up populated by “zombie companies”, burdened by debt and unable to invest in new opportunities for growth.

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