Ineos Quattro - Stuck in the mire.
All,
Please find our initiation on Ineos Quattro here.
Audi uses “quattro” to indicate its all-wheel drive, but unfortunately for Ineos, it is difficult to see how the Ineos Quattro gets out of its problems. All four wheels (business segments) are stuck in the same chemical overcapacity. and the market commentary from one division to the next, it is hard to distinguish the differences.
Investment Discussion:
- We currently do not hold an active position in INEOS Quattro. While headline yields appear attractive, the prolonged uncertainty across global chemical markets and the lack of near-term recovery in volumes and margins make a long position unattractive at this stage.
- At the same time, we are not positioned short. INEOS Quattro has sufficient liquidity to operate through at least the next two years without refinancing its January 2027 maturity, and the debt documentation appears robust, with all instruments ranking pari passu. At current trading levels around the low 70s, a short position does not offer a compelling risk–reward profile.
- For the 2027 bonds specifically, we see limited upside in the near term. It would be imprudent for the company to deploy a material portion of its cash balance to repay the 2027 maturity, making either a refinancing or an amend-and-extend transaction more likely. In this context, the bonds could drift toward levels more in line with the longer-dated issues, implying limited upside of 1–2 points versus potential downside of 10–20 points.
- For the longer dated bonds trading in the 70's, we see a further 10pts of downside. A further delay in the recovery of the wider chemical market would result in liquidity concerns for Ineos Quattro. The upside is limited until recovery in the wider sector.
- One relative value trade under consideration is a short position in the 2027 bonds paired with a long position in the 2029 or 2030 bonds. In a potential amend-and-extend scenario, the company may seek to pressure 2027 bondholders by leveraging the risk of a 2027 default, which could disproportionately impact the near-dated bonds. We will continue to evaluate this opportunity as the situation develops.
Recent Results:
- As part of our anaysis we have assessed the last three quarters and an overview of FY23 and FY24 results. Historic results show a repeated narrative that the bottom has been reached with a rebound expected in the next couple of quarters. However, the recovery hasn't materialised with the latest expectations that FY26 will be a transition period with some glimmers of recovery in FY27. The business has undertaken several cash-conserving measures to manage liquidity.
- The theme remained the same with the Q3 results, with the Company reiterating its plans to reduce workforce, close more plants and seek government aid via anti-dumping tariffs to offset market downturn.
- The outlook for Q4 was weaker than Q3. Management commented that the industry is at the bottom of the cycle, with 2026 expected to be a transition time and 2027 still in transition, with some glimmers of recovery. However, management commented that recovery for Ineos Quattro would be longer than outlined for the wider Ineos Group.
- Leverage remained static at 6.9x excluding leases, 7.2x including leases.
Options available to the Company:
INEOS Quattro is experiencing a prolonged downturn in volumes and margins, with recovery repeatedly pushed out and negative cash flow likely to persist over the next few years, despite holding c.€1.8 billion of cash.
- €1 billion of debt matures in January 2027, creating a near-term capital structure challenge. Management must choose between refinancing at potentially high interest rates, using cash to repay debt, or seeking an amend-and-extend with bondholders.
- Given the robustness of the debt documentation, options to add super-senior debt or structurally subordinate existing creditors appear limited.
-One potential option available to the Company would be to offer the 2027 debtholders a partial repayment and seek to coerce an extension of the remaining balance to 2029–2030. Management could frame the alternative as an imminent default, resulting in the 2027 debt trading pari passu on a cash price basis with the rest of the capital structure. This would be a highly risky strategy for Ineos; however, depending on how the outlook for the chemical markets evolves over the coming quarters, it may be prudent to preserve a portion of available cash rather than fully repay the near-term maturities.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk