A Balanced View

Andy Currie has been a director of INEOS for the past 13 years. As one of the INEOS Capital team he has been instrumental in shaping and progressing the company’s successful growth strategy. Here he talks to Tom Crotty about INEOS, its balanced portfolio of businesses, its future growth and why it was able to weather the full brunt of the European crisis. 

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INEOS Capital interview

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Tom: When you think about INEOS’ growth, some would suggest that it has been opportunistic.
 Do you think that’s fair?

Andy: Historically, I think that’s pretty fair. As you know, in our early days, particularly in the first five to 10 years of INEOS, we were always looking at orphaned assets from blue chip majors that were available, unloved and probably undermanaged and that became our target area. Since the big acquisition of Innovene in December 2005, times have moved on. We have been through some pretty difficult market conditions, but our emphasis these days is much more on running the day-to-day business, getting it more and more efficient and ensuring it’s soundly financed for the future, but with the occasional acquisition. However, those have been very much strategic acquisitions. Seal Sands is a great example of that, where, essentially, we have been able to take over an asset which was struggling, change its costs base, improve its efficiencies and generally turn it around using the whole expertise that we have in the group. A more recent example would be the acquisition of Tessenderlo ChlorVinyls business by Kerling which, again, is going through that same type of progress.

Tom: And what specific benefits have come from that approach?

Andy: The great benefit is that we have the expertise in house. We have lots of people with a great variety of skills in running these operations efficiently. In the case of INEOS Nitriles, we are the largest producer in the world, our technology is all over the world in many, many plants so we have a lot of core expertise in the plants and technology, and we can then bring that to bear in how to run these plants very efficiently and very effectively.

Tom: And what about portfolio products. What does that do for us?

Andy: Essentially we are in many sectors within the chemical industry. The primary benefit of that is that we have robustness of earnings, and robustness of sales, particularly when times are difficult. Because, of course, being in commodities you inevitably have to deal with quite
sharp cycles, so having a wide variety of businesses and applications across different end markets brings with it a natural protection in those bad times. And we have seen that. Obviously the 2008/2009 major downturn – almost meltdown in many ways – was the ultimate test of that. In those days our position was that nearly a quarter of our sales was in the consumables arena. This was very valuable because people continue to need food and this requires packaging which was valuable to us along with other products used in the likes of pharmaceuticals, cosmetics or even soap powers.

Tom: So, whilst we have got a great balanced portfolio of products, you cannot really say that about our geographic balance?

Andy: No. That’s pretty fair. Although, having said that, look at our recent track record. Our profitability has been moving more and more towards 50/50 between North America and Europe, and when we go back to about six years ago, just after the Innovene transaction, about 70% was in Europe. It is not ideally balanced across the world but it is moving in a good direction. Obviously the US these days, with shale gas, is a very interesting market. But we are also keen to increase our exposure to Asia and our earnings in the region and that really is part of our underlying strategy going forwards.

Tom: What are the main strategic challenges for INEOS moving forwards?

Andy: One of our challenges is to get our debt down. We have made lots of progress. The refinancing is now thankfully completed so our next challenge is just to work at the portfolio, use the earnings but get our debt and leverage down to a lower level and at the same time look to fund growth.

Tom: And what about growth? How do you see INEOS growing in the future?

Andy: Our current main thrust, apart from those small opportunities around acquisitions, is that we are really looking at the US Gulf and
the US market generally to see how we can take advantage of the
recent arrival of shale gas. And the fact that you now have this major renaissance of the Gulf coast petrochemical industry and very low
cost ethane feedstock coming into the market. We already have a nice position there and one of our challenges will be to look at how INEOS can take advantage of that. That will be a focus of growth. The other major focus will be Asia, particularly China. Everyone is very familiar with our phenol project but there are others coming behind it. That will be Intermediates where we clearly have very strong positions in markets but also very strong technology positions, so we have something to bring to the table with the Chinese, which is very important.

Tom: And how easy is it to achieve those same results when you work with the constraints of joint ventures?

Andy: Inevitably joint ventures do bring a degree of complication. With two sets of shareholders – even with good alignment – it is more complex. You need to believe the benefits outweigh the disbenefits that come with that. If you take our suite of major joint ventures, we have obviously got the refining joint venture where clearly we have a massive partner, one of the largest companies in the world, now together with us in the refining industry, which is, as you know, very challenged today. But they bring their upstream capability of sourcing to the table, their financial muscle and they also have a very large trading capability in the whole arena so that’s where we see a very natural fit. If you take Styrolution, we have really put together two sets of assets to create the largest styrenics business in the world. There are obviously a lot of synergy possibilities of simplifying the business, reducing costs, and taking the best of both worlds. Joint ventures do work. It is not as straightforward as 100% ownership but, in terms of financing and what’s possible, it’s been very much on our agenda that we can achieve these joint ventures and we get a lot of benefits from them.

Tom: And lastly Andy, around the INEOS Capital table, you have got Jim Ratcliffe supporting Manchester United, Jim Dawson Wolverhampton and John Reece Sunderland, where are your allegiances?

Andy: Well, I must say I have kept my allegiances below the surface for quite some time. I can say it today, though, that I can just about put my nose above the parapet and say Sheffield Wednesday, who have now reached the glorious heights of the Championship as of next year so, yes, somewhat behind the rest of the pack but in recovery mode.

Accidents Cast Long Shadows

One only has to think of Texas city, Piper Alpha and the Deep Water Horizon to understand why INEOS puts safety as its highest priority. Incidents of such magnitude are thankfully very rare throughout the world but it is often smaller incidents that lead to the larger ones. Tackling these not only prevents injuries but also shapes people’s whole attitude to safety and the prevention of incidents.

Most of INEOS’ accidents are slips, trips and falls – or in Köln’s case, hand injuries. The campaign to address these at the site has been so successful that it is now being adopted by neighbouring businesses.

There’s a world of difference between listening and adopting. No-one is more aware of that than Jürgen Schmitz, whose job at INEOS Köln is to deliver the key messages about safety on site to almost 2,000 employees and 1,000 contractors day in, day out – and hope that they have listened and understood.

“It’s not an easy task,” he says. “It can be challenging to find new ways to make safety topics interesting for the audience. But it is so important because safety is paramount on our site.”

The number and severity of accidents on the 191-hectare site has constantly decreased in recent years. 98% of the accidents are behavioural related. Therefore, Jürgen and his team together with Holger Laqua, INEOS Oxide asset manager in Köln, decided to adopt a different approach and, for the first time, hired an advertising agency from Düsseldorf to help them develop an effective safety campaign.

“It proved to be a stimulating undertaking,” said Jürgen. “We are safety engineers and somehow blinkered technical types and they are all very creative and out-of- the-box thinking guys.

“So it was interesting to see and hear about safety interpreted by people who aren’t involved with safety issues every day like we are.

“As such, they came up with very fresh ideas.”

The advertising agency encouraged Jürgen, as head of the occupational health and safety department, and his team to think about safety from an employee’s viewpoint.

Working together they created six different scenarios for a series of hard-hitting posters. Each of these focused on an area where accidents are most likely to occur.

“Instead of hiring external people, we asked our employees if they would contribute as models for the pictures taken on site, in an environment that our staff would recognise,” he said.

The result was immediate. Employees could see themselves in each hazardous situation and could clearly visualise the potential danger.

So far three of the posters – all entitled ‘Accidents cast long shadows’ – have been unveiled. One shows an employee working in a confined space, another working at height and the third focuses on safe biking. The shadows in each picture reflect what could happen in the event of an accident.

“Those are all typically dangerous situations on site and for the chemical industry itself,” said Jürgen.

When each poster was launched, Jürgen and his team organised an interactive safety awareness day with simulators for employees to test their skills and knowledge. There was even a quiz with a prize.

Jürgen says the trigger for the campaign was the desire to make staff think about safety in a new, unknown way.

“It is all about psychology,” he said. “We want employees to stop for a minute and think before they start working.”

So far, the feedback from employees and contractors to the poster campaign has been positive. The message, it seems, has not only been heard, but understood.

In fact the campaign has been so effective and convincing that posters have been translated into Dutch, English, Italian and Norwegian to be used at other INEOS businesses
and sites.

The campaign has also been praised by external organisations.

“Local authorities were very interested in what we were doing and asked to share the posters with other chemical companies in Germany,” said Jürgen.

On a personal level, Jürgen is proud of his team and what has been achieved so far.

“They have had a lot of fun working on this campaign. But we are aware that we still need to push the rock – safety is a constant Sisyphus labour.”

PVC flexes its muscles

INEOS doesn’t have a habit of shouting about its achievements from the rooftops but maybe it should. If you are looking for a company that touches almost everything we do INEOS really is the word for chemicals.

INEOS has been helping to break world records, shape world events and create world champions for years.

As a company, it’s deeply proud of those achievements but there the accolades seemingly end.

For few others - outside the industry - are perhaps aware of the massive contribution that PVC makes to the world of modern sport.

“It’s an amazing material,” said Jason Leadbitter, Sustainability and Compliance Manager for INEOS ChlorVinyls.

“It is cost-effective, long-lasting, easy to maintain and a highly versatile construction material with a favourable environmental footprint.”

That said, Jason said that sadly some would always be institutionally racist against PVC.

“It will always be seen by some as the bad boy of plastics, which really grieves me,” he said.

Fearing that the organisers of London 2012 might buckle under pressure from environmental groups such as Greenpeace and ban PVC from
the Olympic Games – just as the Australian organisers in Sydney had done in 2000 – he, along with other industry representatives, arranged to meet Dan Epstein, Olympic Delivery Authority’s head of sustainable development, about five years ago to make a case for using PVC.

“All we asked for was a fair hearing,” said Roger Mottram, Environmental & Regulatory Affairs Manager for INEOS ChlorVinyls and chairman of the British Plastics Federation Vinyls Group. He also attended the meeting.

“And that’s what we got. He was very good to us.

“He told us that just as the athletes would be expected to raise the bar on performance, he wanted the industry to do the same.

“He wanted us to set new standards and innovate.

“We just wanted the chance to prove we could. And that’s essentially what we intend to do.”

When the London Games officially opened on July 27, more than 142,000 square metres of PVC had been used to create the venues – including the aquatics centre – for the biggest sports’ show on earth.

Athletes competed in arenas with PVC floors and some relied on equipment made from PVC.

The thousands watching as the events unfolded sat under PVC canopies, protected by PVC barriers.

That’s not to mention the miles of PVC pipes and electrical cables that had been laid before the Opening Ceremony, which attracted a worldwide TV audience of over one billion people.

“PVC was in use almost everywhere you looked,” said Roger.

And the reason for that is simple. In short, PVC can withstand pouring rain, raging seas and blazing sunshine, which is good news when one considers Britain’s unpredictable summers.

Those who think, though, that the Olympic Delivery Authority simply caved in under pressure from the PVC industry and gave it an easy ride, should think again.

Aware that the use of PVC is a contentious issue, London 2012’s sustainability group published a policy in 2009 outlining the use of vinyl in the Olympic Park.

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PVC in sport

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“We wanted to use the opportunity of hosting the London 2012 Olympics to work with the industry to set new standards,” said Dan Epstein.

“We wanted to help move the industry towards a more sustainable manufacture, use and disposal of PVC fabrics.”

He said the stringent controls and audit processes had been put in place to ensure that where PVC was used, it was done in an environmentally- friendly way so that much of it could be recycled or reused.

David Stubbs, head of sustainability on the London Organising Committee of the Olympic Games and Paralympic Games, said recycling was important because London 2012 had more temporary venues than at any previous Olympics or global event.

All those temporary structures are due to be torn down and recycled when the Paralympic Games come to a close on September 9.

The PVC will be separated from other materials such as natural textiles, metal and rubber and then recycled or reused.

The proposal is to use some of the PVC at the 2014 FIFA World Cup in Brazil and it is hoped that once the basketball arena has been dismantled that it may be reused at the 2016 Rio Games.

The policy, which was drawn up by London 2012, also insisted that all materials had to:

• INCLUDE at least 30% recycled content;

• 
BE manufactured in accordance with The European Council of Vinyl Manufacturers’ Industry Charter; and

• MEET standards for effluent discharges and vent gases and must not contain lead, mercury or cadmium stabilisers.

Richard Jackson, principal sustainable development and regeneration manager of the Olympic Delivery Authority, spoke of lessons learned in a report, entitled Learning Legacy.

He said despite initial concerns about the policy, the plastics industry had broadly welcomed the approach and said that it had actually stimulated the supply chain to innovate a non-phthalate PVC, which was used in a number of the building wraps.

The policy, he said, had also recognised the PVC industry’s voluntary code, Vinyl2010, which during its 10-year lifecycle had exceeded its own targets on recycling and made good progress in phasing out various additives.

INEOS had been heavily involved in Vinyl2010’s commitment to look at what the industry could do about PVC across Europe and had made a significant financial contribution to its success.

Last year the European PVC industry – buoyed by the success of Vinyl2010 – went even further and signed up to VinylPlus, a new 10-year voluntary commitment.

“With VinylPlus we have put in place some new, more ambitious targets for sustainable development,” said Jason.

All the targets have been indirectly set by stakeholders following a consultation.

“This means we can really address the areas that are perceived to be issues,” he said.

Their plan is to:


• RECYCLE 800,000 tons of PVC every year by 2020;


• PHASE out lead stabliser additives by 2015; and


• REDUCE the amount of energy used in the production of PVC.

“We’re trying to find ways to make people more aware of the benefits of PVC but also show that we’re making progress on environmental sustainability,” said Jason.

At a press conference in London in June, Roger launched a British Plastic Federation brochure PVC in Sport to show how critical PVC had become to the world of high performance sports.

“These are exciting times for sporting events and PVC will play its part,” he said.

The brochure also highlighted the criteria that the Olympic Delivery Authority had set in its PVC policy for London 2012.

Roger said he hoped it would help to spread the message about the sustainability of PVC.

“The UK PVC industry has undergone a transformation after a period when the material was effectively labelled a public menace,” he told journalists.

During a recent interview with British Plastics and Rubber Magazine, Roger spoke of the importance of events like the Olympics to PVC.

“If a lot of PVC is used in big projects like the Olympics and can be shown to meet the very strict sustainability criteria, then we hope that it will encourage others to follow suit,” he said.

“What we’ve shown is that PVC can be recycled and that it can, and is being, responsibly produced at a very high standard.”

Jason said one of the main aims of VinylPlus was also to make stakeholders aware of the contribution PVC made in modern life.

“PVC is incredibly versatile and used in many everyday items that people take for granted,” he said.

The group is also promoting a new study which compares the full cost of PVC against other materials.

“In the current economic climate, where the public sector is under pressure to make savings, we want to show that you can save millions on council budgets if you use PVC products.” he said.

INEOS keeps athletes in the running for gold

Carbon fibre stands to revolutionise the way we all live, work and play. And in many ways, it already has. One only has to watch sprinters competing in the Paralympic Games on carbon-fibre blades. INEOS Nitriles supplies the world with acrylonitrile, the core ingredient needed to make carbon fibre.

No-one will forget the sight of American sprinter Dennis Oehler break the 12-second barrier in the 100-metres at the Seoul 1988 Paralympic Games in South Korea.

For it was the first time the world had seen carbon fibre springs in action.

Those carbon-fibre blades, which have since revolutionised track events for disabled athletes, are today an iconic symbol of Paralympic sport.

And for INEOS Nitriles – the world’s largest producer of Acrylonitrile – it’s yet another reason to feel mighty proud.

Acrylonitrile – a chemical from the cyanide family – is an essential ingredient in the manufacture of carbon fibre.

Without it, the world would not have carbon fibre, and without carbon fibre many important, new developments would simply not be possible.

Barry Slater is global sales director of INEOS Nitriles.

“It is an incredibly exciting area to be working in,” he said.

“The biggest challenge is that carbon fibre is expensive – it’s a lot more expensive than steel - but it’s starting to find its way into many premium markets.”

Take the Boeing 787, America’s state-of-the-art medium-sized, aircraft, which was launched late last year. Its carbon fibre structure has led to a reduction in weight with co2 emissions being slashed by almost 20% compared to existing aircraft.

The people behind the aircraft are Toray, a Japanese company that is now considered the world number one in the manufacture of carbon fibre. The people behind Toray are INEOS, which has secured the rights to supply Toray with Acrylonitrile for the Boeing 787 fleet.

And so far Boeing is believed to have already received orders for more than 800 aircraft from airlines around the world.

“It is fantastic for INEOS,” said Barry.

In the meantime, though, attention is, for now, focused on the Paralympic Games which open in London on August 29.

There, carbon fibre has played a significant role in the dramatic increase in performance for disabled athletes and it is the properties of the material that make it ideal for prosthetics.

For a start it is about five times as strong as steel. It
is stiffer but much lighter. It is made up of strands of carbon, thinner than a human hair that are twisted together and then woven like cloth to make a carbon fibre layer.

Each running blade is made up of more than 80 layers of carbon. Each layer is added one at a time over a mould, by hand. It can take one person two hours to lay the carbon for a single running blade. Pressure and heat are then applied to fuse and harden the carbon layers. It is the moulding and the setting that is the interesting bit.

One athlete competing using carbon fibre running blades will be 100m World Champion Heinrich Popow who almost set a new European record when he ran the 100 metres in 12.43 seconds at Berlin on June 15.

“It was the perfect start to the season,” he said. “And I now cannot wait for London.”

At London 2012 he will be competing in the 100 metres and the long jump.

But it is the 100 metres where he hopes to take home the gold medal to Germany.

“It’s all about the 100 metres and I don’t want to finish second,” he said.

He also hopes his performance will help to raise the bar for all Paralympic sports.

“For me it is clear that all competitors for the Paralympic Games are acknowledged as athletes in their own right, not for their disabilities,”
 he said.

Heinrich, who had once dreamed of becoming a professional footballer, said it had taken time to learn how to run fast with a prosthetic leg, but the secret had been to never give up.

“Sport is the most important thing in my life,” said Heinrich, who was just nine when doctors discovered a tumour in his left calf and told him that his leg had to be amputated.

“No matter whether I win or lose, I don’t give up. I stick with it. I want to encourage other people with my success and show them that there is always an opportunity, even in the biggest setback.”

Also competing at the London 2012 Paralympic Games on a carbon fibre running blade will be Kelly Cartwright. The International Paralympic Committee believes Heinrich and Kelly are two of the athletes to watch this summer.

“I believe you can do everything that you want to do in life regardless of whether you have a disability or not,” said Kelly.

“I am asked quite a bit about the things that I can’t do because of my disability but the only thing that I can think of is wearing high heels.”

Clothed in success

Who would have imagined that clothes – once worn because they were cheap – would today be leading the way in high performance clothing? But that’s the score. And one that both INEOS and Dralon are exceptionally proud of – for very different reasons.

Men and women of a certain age will remember nylon and acrylic.

The synthetic fabrics were popular in the seventies. Nylon didn’t crease and it dried quicker than cotton, and acrylic was bulky and warm.
And both were cheap.

But in time, they became products to avoid.

Barry Slater, global sales director for INEOS Nitriles, remembers those days well.

“Synthetics were considered the poor alternative to natural fibres,” he said. “Their performance and ‘feel’ were worse, but, they had their own place in the market.”

Then something changed. They changed. Like all athletes, they worked on their performance.

“That’s the good thing about synthetics,” said Barry. “Because they are man-made you can actually play with their properties. You can adjust the mix of the chemicals, you can change the characteristics so that they can compete with natural fibres. And sometimes you can make them even better.”

And that’s what Dralon, the world’s largest producer of dry-spun acrylic fibres, did, drawing on INEOS’ piped supply of Acrylonitrile to make it happen.

Dralon and INEOS share a site in Dormagen, near Köln, which makes life easier for both companies to do business.

Every day more than 200 tons of Acrylonitrile, the principal raw material needed for the manufacture of acrylic fibre, are piped to Dralon where magical things have been happening for years.

“A lot of development has been done there over the years,” said Barry.

“Acrylic, for instance, is a lot softer now. It used to be so strong that jumpers would begin to pill. A lot of work has been done to make the fabric weaker so that the little balls of fluff now fall off.”

The result is that today, world-class athletes swear by both nylon and acrylic clothing to enhance their performance.

Little wonder. Today’s acrylic fabrics are clever. If you’re cold, it keeps you warm, and if you’re hot and sweaty, it does something about it. It soaks up the moisture, wicking it away from the body, and transports it up and out so that it evaporates.

That’s unlike cotton, which, when it gets wet, becomes heavy, leading to blisters on feet. The same applies to denim and why you should never go hiking in it. It gets wet and heavy in poor weather.

“Cotton actually becomes almost round when it is exposed to water and sweat,” said Manfred Borchers, head of marketing and sales worldwide for Dralon.

Tests have also shown that nylon dries 60% faster than cotton, with acrylic performing even better – at 75%.

Socks hold their shape and jackets retain their thermal properties even when they are wet.

Dralon produces 188,000 tons of dry and wet spun acrylic fibres every year at its two German plants. Those fibres are then made into a multitude of high performance clothing including socks, sweaters, T-shirts, ski wear and hats.

“Our dry-spun fibre doesn’t absorb any moisture at all,” said Manfred.

The Acrylonitrile industry is now a more than five-million ton industry.

“INEOS is the global number one maker and marketer,” said Barry. “And we ship it across the world.”

INEOS Nitriles’ top five customers include Dralon, Chi Mei, the world’s largest manufacturer of ABS plastic in Taiwan, and Turkish company AKSA, one of the world’s largest acrylic manufacturers.

It also supplies Acrylonitrile to Japanese synthetic fibre maker Toray Industries, the world’s number one in the manufacture of carbon fibre, which – given time – stands to revolutionise the way we all live, work and play.

“Carbon fibre is effectively roasted acrylic fibre,” said Barry. “But it’s an amazing material.”

One only has to look at the iconic Lotus bike that British cyclist Chris Boardman rode to victory at the 1992 Barcelona Olympics.

The acrylic fibre industry, meanwhile, is not as lucrative as it once was.

“It used to produce two and a half million tons a year but it’s now two million due to the fact that polyester, which is cheaper, is competing with it,” said Barry.

He said it was one of the reasons why the acrylic fibre industry had opted to specialise in the high performance sportswear market. It needed a niche market and it found one.

For INEOS Nitriles, the use of Acrylonitriles in the manufacture of plastics used in IT equipment, domestic appliances, like Dyson and car interiors, is an area that is growing.

As a business though, when the stars line up, INEOS Nitriles can turn over about £3 billion a year.

“We have some incredible customers because we have very strong manufacturing of Acrylonitrile,” said Barry. “We own the technology.”

The demand for all fibres, though, is growing. Today’s 35 million ton total fibres market is forecast to grow to 70 million tons by 2020 as economies develop.

As the earth’s land resources are limited and stretched to provide food for the growing population, nearly all of this growth in fibre will come from synthetics.

“That could be good news for acrylic.” said Barry.

Marriage made in heaven

Köln is considered to be the home of acrylic fibres and Acrylonitrile in Europe.

What today is INEOS was then BP. What today is Dralon was then the acrylic fibre unit of Bayer AG.

In the late 1950s, BP and Bayer agreed to build a naphtha cracker in Dormagen to cover

the increasing demand of Bayer for petrochemicals’ derivatives. Around that cracker,

downstream products – building block chemicals – such as Acrylonitrile were installed.

“A big part of the available propylene was transformed into Acrylonitrile and a huge portion of that was, and still is, today fed by pipeline to Dralon,” said Manfred

Borchers, head of marketing and sales worldwide for Dralon.

“In doing that, a very sustainable supply chain was installed way ahead of today’s ongoing discussions of what is sustainable and what is not.”

Today INEOS is a global industry leader in the Acrylonitrile business. Dralon is still global number three producer in the acrylic fibres world despite increasing competition from the Far East where fibres are mainly being processed.

Timed to perfection

INEOS’ big goal for this year had been to refinance the remainder of its borrowing when the time was right. Never one to miss an opportunity, INEOS deemed the time was right in April.
 And it seems others couldn’t agree more.

INEOS made history in the financial world in April

Buoyed by the markets’ response at the end of January to what it could offer investors, it went back as planned to refinance the remainder of its borrowing and achieved the largest-ever covenant-lite loan for a European company and the largest globally since the credit crunch began in 2008.

“It was a staggering achievement by the company,” said Michael Moravec, head of European high-yield syndicate and co-head of EMEA leveraged finance origination at Barclays, global co-ordinators of the financing alongside JPMorgan.

“It eliminated all INEOS’ near-term maturities, took refinancing risk off the table and converted its entire debt structure away from maintenance covenants to simple incurrence covenants.”

He said the upshot of that – maintenance covenants are much more onerous for companies, especially in cyclical sectors such as chemicals – is greater freedom and flexibility for INEOS to operate.

“Management can now concentrate on what it does best, which is managing a chemicals business,” he said.

Elsewhere, reaction to the refinancing package was equally as positive.

Euroweek, the leading weekly newspaper for the global capital markets, said INEOS had shown its clout as
a borrower.

“INEOS was able to switch at the last moment to where the pricing was keenest,” Oliver West, a leverage finance reporter, wrote in an article published at the end of April.

But it was also about timing, as INEOS Finance Director John Reece had forecast when he spoke to INCH magazine in March, after INEOS successfully refinanced a large chunk of its borrowing in January – a year before it needed to.

“You really have to take advantage of the credit markets when they are there because they are very cyclical,” he said.

Malcolm Stewart, a partner at Ondra Partners, a long-standing adviser to INEOS, said the timing had been perfect.

“They nailed it,” he said.

“The initial deal had been so robustly received by the markets at the end of January that INEOS went back to the markets very quickly.”

INEOS also knew the window of opportunity offered by the markets would not be open for very long – and management was right.

Within a month, interest rates had risen by 1%.

“When you are talking about a $3.8 billion refinancing deal, it’s a lot of money, which could be invested elsewhere in the business,” said Malcolm, who described the April deal as the ‘happy culmination’ of four years’ work.

The revival in covenant-lite loans follows the search for ‘yield’ in corporate debt. With interest rates at an all-time low, investors want more for their money and borrowers want more leeway given the unpredictability of the global economy. Covenant-lite loans, which strip away some of the restrictions for companies, offer both.

In April, INEOS Group held investor days in London 
and New York. CEOs from each of the businesses gave detailed information on performance and markets to give investors the opportunity to fully understand the company. It wanted to refinance its senior credit facilities – and extract the best terms – and to do so, it simply made best use of competing demand between US and Euro investors in high-yield bonds and loans.

“The company initially came out with $1.5 billion in loans and $2.2 billion in bonds,” said Malcolm.

“But every investor in the world knows the strength and depth of the US high-yield bond market and that it could have absorbed the entire refinancing.

“So, initially showing a large high-yield bond gave every incentive to loan investors to submit large orders on tight terms.”

In a smart move, INEOS surprised the market – almost at the 11th hour – by dropping the Euro high-yield bond component completely and reducing the US high-yield bond to just $775 million.

Instead, it raised a $2 billion six-year, covenant-lite leveraged loan, a $375 million three-year covenant-lite loan and, the biggest surprise of all, a $500 million six-year covenant-lite leveraged loan.

And there was more good news to come.

INEOS’ successful refinancing also helped to improve its credit rating.

Standard & Poor’s upgraded it from a B to B with a ‘positive’ outlook.

“The rating actions reflect our view of INEOS’ resilient operating performance in recent quarters,” said Oliver Kroemker, associate director and credit analyst at Standard & Poor’s.

And Moody’s Investors Service also changed its outlook on INEOS to positive. It said the refinancing would give INEOS more financial freedom, thanks to the removal of the covenant restrictions.

Most of INEOS’ borrowing stems from 2005 when it took out a series of loans to buy Innovene from BP and many of those loans are now coming to maturity.

John said INEOS could have looked for finance in the equity market instead of the debt market, but chose not to.

“The difference is that one gives INEOS control; the other doesn’t,” he said.

Malcolm said he understood INEOS’ reluctance to be anything other than a privately-owned company.

“Public equity is not in INEOS’ DNA,” he said.

“When you give the public shares, you give them votes and rights in how a company is managed.

“As it stands, INEOS can manage its affairs, through the ups and downs of the chemicals’ cycle, in a way that best suits the company and its long-term needs, without having to worry about shareholders’ shorter-term requirements.”

INEOS Group second quarter trading

INEOS suffered a slowdown in the second quarter of 2012 – after an impressive start to the year.

The Group reported that its earnings (EBITDA) for the second quarter were €308 million compared to €576 million (a quarterly record) for the same quarter last year – and down €157 on this year’s first quarter.

Finance Director John Reece said “Before this INEOS had actually enjoyed a fairly strong April but the impact of steeply declining oil prices – the price fell from $123 per barrel to $94 during the quarter – adversely affected May and June’s historical cost results.”

It meant that non-cash inventory holding losses of about €141 million were incurred during the second quarter, mainly in the Olefins & Polymers businesses.

Chemical Intermediates reported EBITDA of €119 million compared to €267 million in the second quarter last year and €233 million for quarter one. Lower feedstock prices – combined with the general macro- economic uncertainty – had influenced sentiment in the chemical Intermediates businesses.

INEOS Phenol was one of the better performers. The heavy industry turnaround schedule had maintained a strong supply side influence, which had led to healthy margins and volumes.

And INEOS Oligomers also experienced steady demand and solid margins in all sectors.

Volumes and margins for INEOS Nitriles, continued to be relatively weak, with subdued demand for acrylic fibre and ABS in the Far East and Europe.

Meanwhile, INEOS Oxide’s performance was mixed. The demand for ethylene oxide in Europe held up but it had been offset by slow demand for glycols, especially in Asia.

INEOS Olefins & Polymers North America reported EBITDA of €132 million compared to €163 million for the same quarter last year and €175m compared to Q1. The business had continued to benefit from the use of cheaper gas feedstock, which meant it could maintain good margins, and resulting in another record quarterly performance (before inventory holding losses).

The American cracker business environment continued to strengthen with lower feedstock costs, boosting cracker operating margins during the quarter. And Polymer demand remained solid overall, with derivative exports filling the gap from weaker domestic demand as gas crackers remain very competitive globally. One of the crackers at Chocolate Bayou had a scheduled turnaround during the quarter, which was completed successfully.

INEOS Olefins & Polymers Europe reported EBITDA of €57 million compared to €146 million for the same quarter last year and €57 million compared to Q1. Demand for olefins was moderate, with butadiene continuing to perform well. The large decreases in naphtha prices led to healthy cracker margins throughout the second quarter. But volumes had decreased with some customers destocking. The cracker at Rafnes, Norway, completed a major scheduled turnaround during the second quarter. Polymer demand was subdued, though, as customers anticipated lower prices in the wake of weakening oil and naphtha prices. Softness in the commodity polymer markets also resulted in low margins.

In May 2012 the Group successfully issued $775 million Senior Secured Notes due in 2020 and a new Senior Secured Term Loan totalling $3,025 million. The net proceeds had been used to repay all of the remaining indebtedness under the Senior Facilities Agreement, together with accrued PIK interest and associated issue costs.

John said INEOS Group would continue to focus on cash management and liquidity.

INEOS’ net debt was €6.55 billion at the end of
June 2012. Cash balances at the end of the second quarter were €1,247 million, and availability under undrawn working capital facilities was €200 million. Net debt leverage was around 4.9 times as at the end of June 2012.