Obbligazioni societarie Monitor bond Chimica Europa (2 lettori)
- Creatore Discussione lorenzo63
- Data di Inizio
Solvay and Ineos’ Joint Venture Limits Exposure to European PVC Sector
Last Tuesday, Solvay S.A. (Baa1 negative) and Ineos AG (unrated) announced plans to combine their
European chlorvinyls (PVC) activities into a 50-50 joint venture with 2012 pro forma sales of €4.3 billion
and recurring EBITDA of €257 million. The combination would be credit positive for Solvay, allowing the
company to exit the ailing European PVC sector. The deal would also be credit positive for Ineos,
stabilising its PVC subsidiary without committing new capital.
Solvay. When the deal closes in 2013 or early 2014, Solvay will receive €250 million in cash and expects to
contribute some working capital-related assets, liabilities, and pension liabilities, all of which will shore up
its balance sheet. Carving out the capital intensive and less profitable European PVC operations will also
improve Solvay’s overall profitability and capital returns. We estimate its pro forma EBITDA margin will
improve to approximately 18.3% from a reported 16.6% in 2012. However, the divestment will not
significantly dent Solvay’s debt capacity owing to the disposed assets contributing only modestly to Solvay’s
overall earnings and funds from operations.
After the joint venture has operated for three to six years, Solvay will have the option of selling its stake to
Ineos and exiting the European PVC sector. The transaction limits Solvay’s downside exposure, while
retaining exposureto the upside via a negotiated exit pricing formula that links future payments to a 5.5x
multiple of the venture’s mid-cycle EBITDA.
Ineos. For Ineos’ part, its petrochemicals subsidiary, Ineos Group Holdings SA (B2 positive), will
consolidate the ownership of a profitable petrochemicals cracker complex in Norway that it currently
operates in a 50-50 joint venture with the Ineos PVC subsidiary, Kerling plc(Caa1 negative). Ineos Group
Holdings SA will also retain some specialty assets that it will acquire from Kerling and will strengthen its
asset footprint and add some earnings capacity.
Ineos will retain a contingent liability to buy out Solvay’s stake in the PVC joint venture. More
immediately, however, the transaction limits the risks of future capital recourse to Ineos because it is
structured to stabilise the financial profile of the combined PVC subsidiary. The joint venture will have a
higher asset base and revenues supporting Kerling’s existing bonds.
However, whether and how quickly these manoeuvres improve Kerling’s credit will depend on the broader
recovery in the European PVC segment. This is because the segment remains under stress from the
persistent overcapacity related to the reduced level of demand from Europe’s troubled construction
industry, its largest customer.
European PVC producers’ profitability and capital returns have been low since 2008, and consequently
there has been little incentive to invest capital to upgrade plants to meet new European regulations. As a
result, several of the stronger incumbent chemical companies have exited the sector. The Solvay and Ineos
deal follows Arkema SA’s (Baa2 stable) disposal of its European PVC assets in 2012.
We maintain that in order to overcome the sector’s challenges the PVC segment must reduce capacity.
However, none of the industry’s asset disposals so far has resulted in capacity reductions, and the SolvayIneos transaction does not point to any PVC capacity closures. In the absence of sector restructuring, PVC
producers such as Kerling will continue to present higher financial risks.
Last Tuesday, Solvay S.A. (Baa1 negative) and Ineos AG (unrated) announced plans to combine their
European chlorvinyls (PVC) activities into a 50-50 joint venture with 2012 pro forma sales of €4.3 billion
and recurring EBITDA of €257 million. The combination would be credit positive for Solvay, allowing the
company to exit the ailing European PVC sector. The deal would also be credit positive for Ineos,
stabilising its PVC subsidiary without committing new capital.
Solvay. When the deal closes in 2013 or early 2014, Solvay will receive €250 million in cash and expects to
contribute some working capital-related assets, liabilities, and pension liabilities, all of which will shore up
its balance sheet. Carving out the capital intensive and less profitable European PVC operations will also
improve Solvay’s overall profitability and capital returns. We estimate its pro forma EBITDA margin will
improve to approximately 18.3% from a reported 16.6% in 2012. However, the divestment will not
significantly dent Solvay’s debt capacity owing to the disposed assets contributing only modestly to Solvay’s
overall earnings and funds from operations.
After the joint venture has operated for three to six years, Solvay will have the option of selling its stake to
Ineos and exiting the European PVC sector. The transaction limits Solvay’s downside exposure, while
retaining exposureto the upside via a negotiated exit pricing formula that links future payments to a 5.5x
multiple of the venture’s mid-cycle EBITDA.
Ineos. For Ineos’ part, its petrochemicals subsidiary, Ineos Group Holdings SA (B2 positive), will
consolidate the ownership of a profitable petrochemicals cracker complex in Norway that it currently
operates in a 50-50 joint venture with the Ineos PVC subsidiary, Kerling plc(Caa1 negative). Ineos Group
Holdings SA will also retain some specialty assets that it will acquire from Kerling and will strengthen its
asset footprint and add some earnings capacity.
Ineos will retain a contingent liability to buy out Solvay’s stake in the PVC joint venture. More
immediately, however, the transaction limits the risks of future capital recourse to Ineos because it is
structured to stabilise the financial profile of the combined PVC subsidiary. The joint venture will have a
higher asset base and revenues supporting Kerling’s existing bonds.
However, whether and how quickly these manoeuvres improve Kerling’s credit will depend on the broader
recovery in the European PVC segment. This is because the segment remains under stress from the
persistent overcapacity related to the reduced level of demand from Europe’s troubled construction
industry, its largest customer.
European PVC producers’ profitability and capital returns have been low since 2008, and consequently
there has been little incentive to invest capital to upgrade plants to meet new European regulations. As a
result, several of the stronger incumbent chemical companies have exited the sector. The Solvay and Ineos
deal follows Arkema SA’s (Baa2 stable) disposal of its European PVC assets in 2012.
We maintain that in order to overcome the sector’s challenges the PVC segment must reduce capacity.
However, none of the industry’s asset disposals so far has resulted in capacity reductions, and the SolvayIneos transaction does not point to any PVC capacity closures. In the absence of sector restructuring, PVC
producers such as Kerling will continue to present higher financial risks.