Entrepreneurial thinking has saved INEOS a further €30 million a year in interest payments, when the company refinanced some of its borrowing in February.
The latest decision to take advantage of favourable financial markets followed last year’s refinancing when INEOS secured a significant interest rate reduction, which cut payments by $140 million a year.
“If we combine the latest improvement with those of the last 18 months we have reduced the overall interest charge from €550 million to €385 million,” said Graeme Leask, CFO of INEOS Group Holdings.
INEOS was able to drive down the interest rate on its borrowing because of strong demand from investors seeking to participate in INEOS’ success.
“The reaction from the investors in February was extremely positive,” said Graeme. “Demand for the new bond was seven times oversubscribed.”
INEOS had been paying just under 8% on its bonds. It had hoped to pay just over 6% on the new bond. What it achieved was just under 6%.
It also managed to secure a further interest rate reduction on its bank loan.
“We could choose to use these savings to repay debt but our investors know that we have many good opportunities across our businesses to earn money with this investment. So it is better for INEOS and its investors to put this money to work in our businesses than pay down the borrowing,” said Peter Clarkson, head of investor relations at INEOS.
Financial advisors described the latest deal, as a ‘blowout’, said Graeme.
INEOS attributed its success to the communications it has with its investors to highlight the ongoing performance of the company.
“We are very open with our investors and they value that transparency,” said Peter. “Every week, which is unusual in the world they invest in, we write a market update for all investors and analysts with a summary of what has been happening in all our major markets.”
That culture of openness and honesty has also allowed INEOS to reduce the amount of time needed to renegotiate and secure better interest rates.
A bond refinancing deal used to take up to three weeks. Now, because investors know us well, it can be done in a few days.
INEOS did not need to refinance these high yield bonds until 2016 but saw an opportunity to take advantage of the good financial markets and moved quickly.
“We don’t normally wait until we have reached the wire on these things because we want to give ourselves plenty of leeway,” said Peter.
The latest deal also led to an improved credit rating from Moody’s which now matches Standard & Poor’s at B1/B+
“Credit rating agencies are inherently conservative and their default scenario is ‘the world’s going to end tomorrow; explain otherwise’, so to get an upgrade at this point in time is good news,” said Peter.
There are also other added benefits, including the ability to negotiate more credit with suppliers which improves cash flow.
Moody’s analyst Douglas Crawford said the upgrade partly reflected INEOS’ ‘resilient’ performance in 2013 and how well it expected the company to perform this year.
INEOS AG Finance Director John Reece said overall the group had performed well in 2013 and that 2014 had got off to a good start. Most of INEOS’ profits, though, are coming from America, rising from about 60% in 2012 to almost 70% last year.
“Shale is not the only reason we are doing well in the US but it has been transformational,” he said.
INEOS is planning to invest heavily in the US over the coming year.
“That investment is very much our number one priority,” said John.
Plans in the pipeline include a polyethylene plant, an oligomers plant and possibly a new ethylene oxide plant.
John said, “Europe, particularly southern Europe and the UK, are still challenging but our decision to import low-cost shale-derived ethane gas from America to Europe will help to reduce operating costs at our European gas crackers which will help us to remain competitive.”
Looking ahead, the journey, which began in April 2012 when INEOS secured the largest-ever covenant-lite loan for a European company and the largest globally since the credit crunch, will continue.
“It is part of our strategy,” said Graeme. “We are opportunistic so if there is an opportunity in the market to reduce our interest rates or extend our fi nancing, then we are always ready to do that.”