Ineos asks for covenant waiver

Ineos, the UK’s largest private company, is asking senior lenders to waive covenants for the first six months of next year, to avoid an expected breach. The company told investors it was impossible to provide credible forecasts for performance in the current environment, but said it would bring forward a new five-year business plan in April next year.

Ineos’s bank covenants test leverage, interest cover and debt servicing.

In exchange for agreeing the waiver Ineos is offering to pay consenting lenders a fee of 50bp and increase the interest margins by 100bp to 125bp. Banks have until December 9 to agree to the deal.

Those involved expect the consent to be granted, though there is likely to be pressure from lenders to increase the fees and margin on offer. The company requires a simple two-thirds majority of senior debt investors to consent to the waiver in order for the deal to be carried. The syndicate includes more than 200 debtholders, a mix of banks and funds.

In the aftermath of the move, the cost of five-year Ineos CDS protection gapped out to a staggering 70% upfront in the second half of last week, a figure all the more astonishing given cash bonds traded as low as 16–17, and in the very low 20s at most.

The waiver request targets loan investors only, with bondholders now effectively squeezed between the equity owners, who remain in a position to propose new financing arrangements, and senior lenders, who will be paid out for agreeing to the initial waiver and again in the event of a new financing.

Despite the CDS levels, there seems to be no immediate concern for Ineos’s solvency, as Ebitda for the third quarter was €402m and the company had €1.8bn of cash and undrawn committed facilities available as of September 30 2008.

In fact, people involved suggest the company had considered an earlier plan to use liquidity to deleverage via a third-party managed buyback of discounted bonds in the secondary market.

Ineos launched the waiver consent process last Monday, with a bank meeting held in London last Thursday. Banks reported a big turnout at the London meeting, suggesting a significant proportion of the facilities investors were represented.

Ineos’s lead bankers, Barclays Capital and Merrill Lynch, have approved the bank covenant waivers. Lazard is advising the company.

The Ineos waiver request is the latest shock to the system for leveraged finance investors. Up to recent times Ineos was considered a defensive name and is widely held and has been widely traded.

However, the past year has been tough. Ineos’s biggest customers are the housebuilding and automotive sectors. Oil volatility had a particularly stark impact by raising the cost of raw materials over the summer then prompting a write-off in inventory valuations later in the year as oil prices fell.

Earnings to the end of the third quarter were €1.3bn, rather than the expected €1.5bn, and at the end of December the company had net debt of €7.3bn and leverage of four times Ebitda.

The core of Ineos’s current debt facility was put in place in 2005 when the company acquired Innovene from BP, a record buyout for Europe backed by €6.77bn of senior secured debt and €2.355bn of high-yield bonds.