June 28, 2009

Jim Ratcliffe faces 6bn D-day with bankers

Tomorrow is a big day for Jim Ratcliffe, the secretive and arguably most successful British postwar industrial entrepreneur. He has to face down 600 bankers and persuade them to support his company through difficult times.

fs rise has been one the most remarkable and least-told stories of the last bull market. In the space of a decade he built Ineos, a chemicals company, from a modest buyout to a giant with sales of 23 billion last year.

In the process he created Britain
fs largest privately owned company, surpassing the John Lewis Partnership. It became the third biggest in the world in its sector. It is a company that touches nearly every aspect of our lives, making the plastics that go into computers, pipes, cars and household goods, yet it has no public profile.

For a while the runaway success at Ineos also made him fabulously rich, on paper at least.
Ratcliffe, 56, controls 75% of Ineos and, at the peak of the cycle, when profits hit 1.7 billion, his personal stake was estimated to be worth 2.3 billion. Like all postmillennium business successes, he achieved it with debt - lots of it - and now that is coming back to haunt him.

On Monday, at Gibson Hall, the greatest of London
fs banking halls, he will try to persuade his lenders to relax the terms on 6.4 billion of senior debt. The lead banks in the syndicate have already agreed the terms, but to succeed he needs all 230 to fall into line. Following his presentation, Ratcliffe and his team will hold a series of one-to-one meetings with each of the banks, who will then have until July 15 to accept. But the agreement comes at a price: the new terms will cost Ineos more money. The total bill is 300m, though 145m is a payment in kind and 57m is one-off fees. The group also has a 3.4 billion corporate bond, but this facility will be unaffected.

Ratcliffe is confident the banks will support him. This weekend, in an exclusive interview with The Sunday Times, he explained the five-year plan to extricate Ineos from its debt burden. He emphasised that his company has not actually defaulted on any loan and said it can trade its way out of difficulty.

He also explained the philosophy and structure of the company.
gWe have raised 7.5 billion of debt, so we have some very serious obligations to pay it back ,h he said. The company has already paid back 1 billion. gWhen we have shown good results, things will settle back with our banks to a more normal relationship.h With characteristic understatement, he said of the past six months: gIf you easily succumb to stress, then you would have struggled.h

The five-year plan involves making profits of 940m for this year and 1.3 billion in 2010 and then refinancing all the companyfs loans. Last year Ineos made 1.4 billion but that was before an 850m provision. Because of the nature of Ineosfs businesses, he said it is always one of the first sectors to be hit when the economy slows. However, he has seen signs of green shoots, particularly in Asia, and that has provided some encouragement.

The public only woke up to the scale of Ineos when it became involved in a dispute with the unions over pensions at Grangemouth, an oil refinery, that threatened national shortages of petrol and gas. Until then few outside the industry had heard of the company or its founder.

The transaction that changed Ineos overnight was the
5 billion purchase in 2005 of Innovene, BPfs chemicals business.

Ratcliffe said:
gWe had been talking to BP for two years, but the deal finally came to us in the summer of 2005. They said, we are going to float this business on the New York Stock Exchange but we are going to run a parallel process for a trade sale. We are talking to only three people.h Ineos was given 10 weeks to carry out the work. In that time it also had to raise 5 billion of debt to finance the deal. In the event Barclays Capital and Merrill Lynch stepped in to provide the funding.

Ratcliffe is no stranger to challenges. Just over two months ago he returned from a seven-day trip to the North Pole, with his two sons and a few friends. They walked the Last Degree, which involved getting dropped off by a
gshaky Russianh helicopter with a guide in temperatures of -45C.

gI like the odd challenge. Life in Ineos is quite intense and my release from all of that is to do outdoor stuff. I occasionally go to the theatre but I would rather do something physical.h On that expedition he knew what the dangers were: gweather, thin ice and open waterh.

Ratcliffe is now coming to terms with a different set of problems. Because of the scale of the business, everything about Ineos is big. It employs 14,970 staff, has 4,500 employee shareholders and 64 manufacturing sites producing 40m tonnes of chemicals and 20m tonnes of refinery products.

In August last year, when top directors at Ineos returned from holiday, they saw a big problem ahead. The order book had fallen some 30% and margins were being hit hard. In addition, the oil price had slumped. For a company that has 10m barrels of oil on its sites at any one time, that was a huge problem. Because of accounting rules, the stock had to be written down to reflect the oil-price fall, which created a provision of
850m and was why the company had to contact its banks.

Ratcliffe didn
ft know the extent of the economic tsunami that was to hit his industry, but he did act swiftly. Ineos is split into 18 companies and headed by Ineos Capital. This is run by four people: Ratcliffe and three lieutenants, Jim Dawson, Andy Currie and John Reece, his finance director. The last two came with him from Ratcliffefs former quoted company, Inspec.

Every Monday morning the four have a 30-minute conference call, with each of the 18 divisional chief executives dialling in to give a short resume. In the first week of September, Ratcliffe ordered his divisional heads to take out 10% of their cost base and to destock. Then in the first quarter of this year, he did it again. Salaries were frozen, bonuses canned and the contractors were hit hard.

In total, since last September some
340m of costs have been taken out, an impressive figure when half its costs are fixed with jetties, tanks and refineries. In addition Ratcliffe said capital spending was cut from 680m to 210m.

He is confident his group
fs fortunes will return with the economic cycle, and believes the groupfs structure motivates his staff to perform. Bonuses are linked directly to the division you work in, decisions are decentralised. Ratcliffe has a policy of gno bullshith, of empowering people to make decisions.

And the decisions they have to take will be tough. A stake in Grangemouth is up for a sale as are a number of other nonkey assets. Ratcliffe will also have to do more to build relationships. He knows he has to be less secretive and correct some of the misconceptions about him. Two of them are that he enjoys sitting on lawnmowers and commuting by helicopter. For the record he has not sat on a lawnmower for 20 years, and he doesn
ft have a helicopter ? though he does love heli-skiing.