An industry slowdown and existing spending commitments are putting pressure on global chemicals group Ineos Group Holdings S.A. (IGH; BB/Stable/--). The cyclical downturn in the petrochemicals industry worked to weaken IGH's credit metrics in the second quarter of 2023, prompting us to reduce our EBITDA forecast for the full year. This comes close on the heels of the start of group's new investment cycle. Investments include €4.0 billion in the development of a new ethane cracker in Antwerp, Project One, for which IGH recently lost its permit, and large acquisitions in Asia that will increase IGH's leverage. Here, S&P Global Ratings answers frequently asked questions about these headwinds and the effect they are having on IGH's and the wider group's credit quality.
Frequently Asked Questions
Why did IGH's credit metrics weaken in second-quarter 2023, and what does S&P Global Ratings expect to happen in the full year?
The weakening in IGH's credit metrics was due to a combination of two factors: the group's sizable organic and inorganic investments, which have increased its debt; and the downturn in the petrochemicals industry, which started in the second half of 2022 as a result of stagnant demand and capacity additions. The resulting oversupply led to an industry-wide deterioration in operating rates, prices, and margins.
In this environment, IGH's S&P Global Ratings-adjusted EBITDA of about €1.75 billion in the 12 month-period ending in June 2023 was broadly in line with our expectations. In contrast, we had assumed a gradual recovery in demand in the petrochemicals industry in the second half of 2023, but no longer think this will be the case. A recovery in demand has yet to materialize, notwithstanding the low inventory levels across the value chain.
We have therefore updated our forecasts, and now expect IGH's adjusted EBITDA to remain at its currently low level of €1.7 billion-€1.8 billion in 2023, leading to adjusted debt to EBITDA of 5.0x-5.3x. This contrasts with our previous forecasts of EBITDA of about €2.0 billion by year-end 2023, still well below €2.9 billion in 2022, and adjusted leverage of 4.5x-4.8x.
While we factor in IGH's cost-saving initiatives and guidance for lower capital expenditure (capex) in 2023, the group's credit ratios are more sensitive to its profitability metrics due to the recent increase in debt. The depressed levels of EBITDA therefore more than offset IGH's initiatives to preserve cash, in our view.
What is the effect on IGH's rating headroom and stand-alone credit quality?
We use our group rating methodology to assess our ratings on IGH and its related entities. This means that our rating on IGH continues to reflect the creditworthiness of the wider Ineos group. We view IGH as a core member of this group, so we equalize our rating on IGH with our group credit profile assessment for the wider group. This assessment reflects our view of the creditworthiness of the rated entities--IGH, Ineos Quattro Holdings Ltd. (Ineos Quattro), and Ineos Enterprises Holdings Ltd.--as well as the unrated entities in the topco Ineos Ltd.'s organizational structure, based on public disclosures and discussions with management.
While IGH's credit metrics have worsened, the other entities in the wider group have not exhausted their rating headroom. Ineos Quattro's rating headroom, for example, is still healthy. We forecast that Ineos Quattro's adjusted debt to EBITDA will increase to 3.3x in 2023, before decreasing to 2.8x in 2024, thanks to a debt reduction in 2022 and management actions to cut costs. This compares with a downgrade trigger of 4.5x. (For further details, see "INEOS Quattro Holdings Ltd.," published Aug. 8, 2023, on RatingsDirect.)
Therefore, although IGH accounts for about 40% of the wider group's EBITDA, headroom within the group credit profile thanks to lower leverage in other parts of the group may continue to support the rating on IGH in the near term. That said, looking at IGH on a stand-alone basis, we could revise downward our assessment of IGH's stand-alone credit profile (SACP) from the current 'bb' level if we think that a recovery in earnings--and a concurrent reduction in adjusted debt to EBITDA to about 4.5x or lower--is unlikely in 2024. As per our criteria, this would not affect the issuer credit rating as long as our assessment of the wider group's creditworthiness and IGH's status within the group remained unchanged.
We are keeping a close eye on the pace and timing of the recovery in demand for olefins and polyolefins, as this would allow IGH to improve its operating rates and margins. If demand remains stagnant and pressure on soft chemical commodity prices persists into 2024 due to additional capacity, it will likely compound the pressure on IGH's SACP.
How does S&P Global Ratings calculate IGH's debt and EBITDA?
We define EBITDA as revenue minus operating expenses plus depreciation and amortization (including noncurrent asset impairments and impairment reversals). We generally exclude adjustments for items like restructuring costs, which we consider operational. We include cash dividends from investments accounted for using the equity method, and exclude IGH's share of these investees' profits. This will be an important consideration for IGH, given its recent and upcoming investments in joint ventures in China. That said, we do not assume that IGH will receive any dividends in 2023, as the SECCO ethane cracker that is part of one of IGH's joint ventures with SINOPEC is under scheduled maintenance. We assume very limited dividends in 2024.
We calculate IGH's debt on a net basis. We adjust for items that we consider debt-like in nature, such as lease obligations and underfunded employee postretirement benefits (on a tax-adjusted basis). We also include the drawn portion of the project financing relating to IGH's investment in Project One.
| Ineos Group Holdings S.A.--Reconciliation Of Reported Amounts With S&P Global Ratings' Adjusted Amounts | |||||||
|---|---|---|---|---|---|---|---|
| --Fiscal year ended Dec. 31, 2022-- | |||||||
| Ineos Group Holdings S.A. reported amounts | |||||||
| (Mil. €) | Debt | EBITDA | Operating income | Interest expense | S&P Global Ratings' adjusted EBITDA | Cash flow from operations | Capital expenditure |
| 8,753.8 | 2,836.4 | 2,001.3 | 311.3 | 2,849.9 | 2,740.7 | 1,165.2 | |
| S&P Global Ratings' adjustments | |||||||
| Cash taxes paid | -- | -- | -- | -- | (148.1) | -- | -- |
| Cash interest paid | -- | -- | -- | -- | (298.8) | -- | -- |
| Reported lease liabilities | 1,089.3 | -- | -- | -- | -- | -- | -- |
| Postretirement benefit obligations/deferred compensation | 507.4 | 4.9 | 4.9 | 9.4 | -- | -- | -- |
| Accessible cash and liquid investments | (2,279.1) | -- | -- | -- | -- | -- | -- |
| Capitalized interest | -- | -- | -- | 13.6 | (13.6) | (13.6) | (13.6) |
| Dividends received from equity investments | -- | 4.4 | -- | -- | -- | -- | -- |
| Nonoperating income (expense) | -- | -- | 240.9 | -- | -- | -- | -- |
| Reclassification of interest and dividend cash flows | -- | -- | -- | -- | -- | (263.3) | -- |
| Debt: Contingent considerations | 2.1 | -- | -- | -- | -- | -- | -- |
| EBITDA: Other (situational) | -- | 4.2 | 4.2 | -- | -- | -- | -- |
| Total adjustments | (680.3) | 13.5 | 250.0 | 23.0 | (460.5) | (276.9) | (13.6) |
| S&P Global Ratings' adjusted amounts | |||||||
| Debt | EBITDA | EBIT | Interest expense | Funds from operations | Cash flow from operations | Capital expenditure | |
| 8,073.5 | 2,849.9 | 2,251.3 | 334.3 | 2,389.4 | 2,463.8 | 1,151.6 | |
What would the credit impact be if IGH is unable to regain its Project One permit?
At this stage, it is uncertain whether this project for a new ethane cracker in Antwerp will continue. We understand that IGH is reviewing its options, and that it plans to work toward regaining its permit to resume work on the site. In the meantime, we continue to include the capex plans relating to this project in our base case.
There are two overarching factors in our assessment of Project One. From a business standpoint, we believe that Project One would strengthen IGH's competitive advantage thanks to the project's small environmental footprint and reliance on cheaper U.S. ethane feedstock. Importantly, we think that Project One represents a low marketing risk because it would replace an external supply of ethylene with a cheaper, internal source.
From a financial risk point of view, the project entails a significant financial burden of €4 billion for IGH in the near-to-medium term, part of which it has already invested, in 2022 and 2023. The cost of the investment is front-loaded because we do not include management's estimate of about a €600 million EBITDA contribution during mid-cycle conditions in IGH's pro forma metrics. Therefore, the cost will weigh on IGH's debt metrics until mid-2026, when the plant would become operational and IGH would start to benefit from the profits.
If the permit is not reissued, all else being equal, we estimate that IGH's deleveraging could accelerate, with adjusted debt to EBITDA decreasing to about 4.0x in 2024 and about 3.0x in 2025, from 5.0x-5.3x in 2023. This is notwithstanding the mandatory repayment of the €522 million that IGH has drawn from its project finance facilities in the 18 months from the annulment of the permit, if the group does not regain it.
Related Research
- Tear Sheet: INEOS Quattro Holdings Ltd., Aug. 8, 2023
- Update: Ineos Group Holdings S.A., July 4, 2023
- Ineos Enterprises Holdings Ltd., May 25, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Nikolaos Boumpoulis, CFA, London +44 20 7176 0771; nikolaos.boumpoulis@spglobal.com |
| Secondary Contacts: | Paulina Grabowiec, London + 44 20 7176 7051; paulina.grabowiec@spglobal.com |
| Ivan Tiutiunnikov, London + 44 20 7176 3922; ivan.tiutiunnikov@spglobal.com |
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