Fitch Ratings has downgraded INEOS Group Holdings S.A.'s (IGH) Issuer Default Rating (IDR) to 'BB' from 'BB+'.

The Outlook is Stable. Fitch also downgraded the senior secured ratings of debt issued by Ineos Finance Plc and Ineos US Finance LLC to 'BB+' from 'BBB-', and assigned expected senior secured ratings of 'BB+(EXP)' to the seven-year term loans B (TLB) proposed by these entities. The Recovery Ratings are 'RR2'.

The downgrade reflects IGH's high leverage, resulting from prolonged weak chemical markets in 2023 and 2024, sustained sizeable acquisitions, and large capex until 2025 as IGH builds Project One (P1). This will drive EBITDA net leverage to peak at 6.8x in 2024 and return below 4x in 2026. We assume P1 lifts EBITDA from 2027. The Stable Outlook reflects our expectations that deleveraging will be achieved as chemical markets recover, contributions to cash flows from acquisitions rise and takes into account IGH's efforts to reduce non-P1 capex, costs and dividends, especially in 2024.

IGH's rating continues to reflect its position as one of the world's largest petrochemical producers, with leading market positions in Europe and the US and a growing presence in Asia. It manufactures a wide range of olefin derivatives serving diverse end-markets and operates large integrated production facilities with partial feedstock flexibility.

IGH plans to raise about EUR2 billion equivalent in TLB and other senior secured debt. The proceeds will be used to repay existing senior secured debt, finance two upcoming acquisitions, pay transaction fees and expenses, and for general corporate purposes including to prefund P1. We will assign final ratings upon receipt of final documentation largely conforming to the draft documentation reviewed.

Key Rating Drivers

Leverage Surge: We expect EBITDA net leverage to rise to 5.9x in 2023 and 6.8x in 2024 due to a combination of prolonged weak chemical markets, high growth capex and significant loans to related parties. We forecast Fitch-defined EBITDA to fall 44% in 2023 to EUR1.5 billion and to modestly increase to EUR1.7 billion in 2024 due to the impact of acquisitions and the recovery of chemical demand in 2H24. Meanwhile, we forecast net debt to peak at EUR11.5 billion in 2024 due to P1 capex and about EUR1.7 billion of outflows related to acquisitions.

This is despite our expectation of no dividend payments and strict control of non-P1 capex in 2024. IGH's leverage will decline from 2025, assuming a further improvement in market conditions supporting EBITDA growth, and will fall below 4x in 2026.

P1 Supports Costs Position: IGH is constructing a new 1.45 million tonne per year ethane cracker in Belgium, which will supplement IGH's ethylene requirements in Europe, contributing up to EUR600 million of additional EBITDA. Similar to IGH's ethane cracker in Norway, P1 will receive ethane feedstock from the US, resulting in a cost advantage over most EU naphtha crackers. This will increase IGH's exposure to US ethane feedstock, in addition to its US assets (about 45% of production capacity). Moreover, P1's expected low emissions will position IGH well for possible future regulation in Europe.

P1 Debt Consolidated: We include P1 project finance debt in our calculation of financial debt due to the strategic nature of the investment for IGH, despite the lack of recourse to IGH, as we would expect its financial support if needed. Excluding P1 debt, we estimate that IGH's EBITDA net leverage will average 5x in 2023-2025 and fall below 3x from 2026, while its free cash flow (FCF) will be positive. The EUR4 billion project is funded by a EUR3.5 billion facility, which will start amortising once P1 is completed, over 10 years.

Sustained M&A: In 2024 IGH will spend about EUR1 billion to acquire Lyondellbasell's US ethylene oxide business and for an INEOS affiliate's and TotalEnergies' cracker and derivative assets in Lavera. We also assume the 50% stake in the Tianjin Nangang Ethylene Project (Tianjin) to be acquired in 2024 upon completion. This follows USD1.8 billion spent in 2022-2023 for Mitsui Phenols Singapore Ltd and the 50% interest in Shanghai SECCO Petrochemical Company Limited (SECCO). These acquisitions increase the group's exposure to Asia, reinforce its oxide business and continue to grow the group's scale.

In our view, this sustained activity during the market downturn illustrates IGH's opportunistic approach to acquisitions, to take advantage of attractive asset valuation, which may be more cost efficient than greenfield investments.

Market, Capex, Group Risks: The volatility of the chemical markets and the extent of current capacity oversupply cast doubt on the timing and strength of a recovery. Global capacity rationalisation may be required to re-balance supply with weak demand due to lower growth in China, the world's largest chemical market, compared with historical standards. Moreover, the P1 permit issue, now resolved, highlights the execution risks of such projects, in addition with possible cost overruns. Finally, large related-party transactions have reduced liquidity, with uncertain repayment timings.

Notching for Instrument Ratings: About 75% of IGH's debt at end-3Q23 consisted of senior secured notes and term loans, which rank equally among themselves. The remaining debt mainly consists of debt facilities used to fund the acquisition of assets and capex. The senior secured debt contains no financial maintenance covenant and is rated one notch above the IDR to reflect its security package.

Rated on Standalone Basis: IGH is the largest subsidiary of INEOS Limited, accounting for almost half its EBITDA, but we rate it on a standalone basis as it operates as a restricted group with no guarantees or cross-default provisions with INEOS Limited or other entities within the wider group.

Corporate Governance: IGH's corporate governance limitations are a lack of independent directors, a three-person private shareholding structure and key-person risk at INEOS Limited, as well as limited transparency on IGH's strategy around related-party transactions and dividends. These factors are incorporated into IGH's ratings and are mitigated by strong systemic governance in the countries in which INEOS Limited operates, its record of adherence to internal financial policies, historically manageable ordinary dividend distributions, related-party transactions at arm's length, and solid financial reporting.

Derivation Summary

IGH's business profile reflects its large, multiple manufacturing facilities across North America, Europe and Asia, and exposure to volatile and commoditised olefins and its derivatives. This is consistent with that of sector peers, such as Celanese Corp. (BBB-/Stable), BASF SE (A/Stable) and sister company INEOS Quattro Holdings Limited (Quattro; BB/Negative).

BASF is larger, more geographically diversified and with greater exposure to downstream production than IGH. Moreover, we forecast BASF to maintain lower EBITDA net leverage at about 2x in 2023-2026.

IGH has stronger market-leading positions, larger scale and greater diversification and production flexibility than Celanese, which is focused on acetyls. However, Celanese has stronger EBITDA margins in the 20% range and EBITDA net leverage expected below 5x in 2023-2024.

IGH's scale and diversification is comparable to Quattro's. However, we believe that IGH's cost position is stronger due to its ability to use ethane feedstocks at its US and Norway cracker, which provide a sustainable cost advantage in olefins and polymers. Both IGH and Quattro's EBITDA net leverage will rise significantly above their rating sensitivities in 2023-2024, but we expect Quattro's to return below the negative sensitivity in 2025, compared with 2026 for IGH.

IGH's structure is complex compared with peers as it is part of the wider INEOS Limited, embracing other chemical businesses, mostly in Europe, with a three-person private shareholding. INEOS Limited has a record of opportunistic M&A activities and related-party transactions across the group, which increase the risk of temporary surge of leverage above publicly stated leverage targets.

Key Assumptions

Revenues to fall 29% in 2023, then growing 7% in 2024 and 2025, 4% in 2026 and 1% in 2027

EBITDA margin to fall to 10% in 2023, growing to 11% in 2024, 13% in 2025, 14% in 2026 and 15% in 2027

Capex of EUR1.45 billion in 2023, EUR1.75 billion in 2024, EUR1.4 billion in 2025, EUR1.1 billion in 2026 and EUR0.8 billion in 2027

P1 completed in 2026 with EBITDA contribution from 2027.

Dividends of EUR250 million in 2023, no dividend in 2024 and EUR200 million-EUR250 million from 2025 onwards

Acquisition of 50% stake in Tianjin Nangang ethylene project and the ethylene oxide asset from Lyondellbasell to close in 2024

Dividends received from SECCO JV and Tianjin JV from 2025 and 2026 onwards, respectively

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

EBITDA net leverage maintained at or under 3x through the cycle

Corporate-governance improvements, in particular, better transparency on decisions regarding dividends and related-party loans, and independent directors on the board

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

Further weakening of leverage metrics versus Fitch's rating case linked to acquisitions or higher dividends leading to forecast EBITDA net leverage remaining above 4x beyond 2025

Significant deterioration in business profile such as cost position, scale, diversification or product leadership or prolonged market pressure translating into EBITDA margins well below 10% on a sustained basis

Liquidity and Debt Structure

Robust Liquidity: At 30 September 2023, IGH had unrestricted cash of EUR2.1 billion, which easily covers EUR0.2 billion of debt due within the next 12 months. In addition, it had EUR541 million undrawn under its EUR800 million receivables securitisation facility, which matures in December 2024. An inventory financing facility also supports liquidity. Capex for P1 will mostly be funded by a EUR3.5 billion project finance facility.

Higher Interest Costs: Most of IGH's debt had floating interest rates as of 30 September 2023. We expect interest expense to rise to EUR570 million in 2023 from EUR154 million in 2022. Interest-rate hedges until 2025 partially offset some of the increased interest cost due to rising base rates.

Issuer Profile

IGH is an intermediate holding company within INEOS Limited, one of the largest chemical companies in the world, operating in the commoditised petrochemical segment of olefins and polymers.

Summary of Financial Adjustments

Fitch reclassified EUR1,089 million of lease liabilities to other financial liabilities and excluded them from financial debt

Fitch reclassified EUR52 million of lease interest expense and EUR175 million of right-of-use asset amortisation as cash operating costs, reducing EBITDA by EUR227 million

Fitch excluded EUR160 million used as collateral against bank guarantees and letters of credit from available cash and equivalents

Debt increased by amortised issuance costs of EUR124 million

Fitch excluded EUR4.2 million of exceptional expenses from EBITDA for 2022

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

We have revised IGH's ESG Relevance Score for 'Governance Structure' to '4' from '3' due to ownership concentration and a lack of board independence in light of opportunistic decision-making process despite weak chemical market conditions. IGH has an ESG Relevance Score of '4' for 'Group Structure' due to the complex group structure of the wider INEOS Limited group and of IGH and related party transactions. These scores have a negative impact on the credit profile, and are relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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