Ineos Quattro - What has Changed - Positioning
All,
Please find our previous analysis on Ineos Quattro here.
At the time of our initial work, we outlined several potential trading strategies but ultimately waited for a more attractive entry point. While headline yields looked compelling, our fundamental view of a prolonged trough in the chemical market made a long position unattractive. At the same time, we hesitated to take a short position given the ample liquidity available. Subsequent to this work, we initiated a 5% short position in INEOS Quattro 2.25% 2027 bonds at 96.75%, based on our view that the 2027 maturity would not refinance at par. We put this position on in late January, at a time when market speculation centred on a potential equity injection, and additional inventory financing had caused the bonds to rally. Since then, the company has confirmed a $200m equity commitment from shareholders. In parallel, INEOS Quattro has extended its trade receivables securitisation facility and entered into two new inventory monetisation agreements, together providing approximately €300m of liquidity through January 2028.
Investment Rationale:
- We are rotating our short exposure. We have covered the 2027 position at 98%, crystallising a 1.25-point loss, and initiated a new 5% short position in the INEOS Quattro 6.75% 2030 bonds at 75%, with the view that the recent rally will not be sustained.
- We are looking for the bonds to return to January levels, giving the trade 10pts + of upside. Downside is further tightening, but we believe this is limited in the short term. We see yields of 12-14% as realistic tights, meaning the bonds could rally further to 77-79%, a further 4pts.
- The incremental liquidity has driven a rally in the short-dated instruments, with the 2027 bonds now quoted around 97.5%. More notably, the longer-dated bonds have outperformed, rallying by 6–10 points across the curve and compressing yields by 300–500bps to current levels of roughly 14–18%, depending on maturity. However, we see little evidence of a fundamental improvement. Q4 operational performance was weaker than expected, and management provided no firm guidance pointing to a near-term recovery. While management continues to repeat the turnaround narrative, it has also emphasised that any recovery would first become visible at the wider INEOS Group level, with Quattro lagging by 6–12 months. - At present, there is no observable recovery at the group level.
- Rising geopolitical risk in the Middle East has added a fresh oil price risk premium. For INEOS Quattro, higher energy and feedstock costs are more likely to exacerbate margin pressure than support earnings, reinforcing our view that the recent bond rally is macro-driven rather than underpinned by improving fundamentals.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk