June 25 (Bloomberg) -- The cost of protecting debt of Ineos Group Holdings Plc from default fell after the U.K.’s biggest chemicals company said a “sounding group” of lenders agreed to changes to its $10.5 billion of borrowings.

Credit-default swaps on Lyndhurst, England-based Ineos dropped to 61.6 percent upfront, from 65.6 percent, meaning it now costs 6.16 million euros ($8.6 million) and 500,000 euros a year to protect 10 million euros of debt, according to CMA DataVision prices.

Ineos was forced to request banks set aside conditions on its debt in December after demand for its products collapsed. The company’s 230 lenders have been asked to support the sounding group and agree to reset the company’s debt covenants in exchange for a consent fee and higher interest margins, Ineos said in a statement today.

“The banks had their backs against the wall because they didn’t want to take over the company and liquidate the assets in the current environment,” said Jochen Schlachter, an analyst at UniCredit SpA in Munich. “Recoveries are very low at this point so nobody has an incentive to trigger a credit event.”

Ineos loans are the best performing in Europe this year, according to Morgan Stanley prices, having jumped to about 65 percent of face value, from 36 percent. The price of Ineos’s 1.63 billion euros of 7.875 percent bonds due 2016 rose to 23 cents on the euro, from 7.75, according to RBC Capital Markets data on Bloomberg.

‘Solid Foundation’

“Ineos believes that the proposed package of amendments provides a solid foundation for the group to address current market conditions and focus on the implementation of its long- term strategy,” the company’s statement said.

Investors that face getting little or nothing back in a liquidation are allowing companies to breach debt conditions or refinance by buying back bonds and loans at deep discounts. Bondholders of rival chemical group LyondellBasell Industries AF SCA will recover as little as 2 cents on the dollar after it defaulted, triggering an auction to settle credit-default swaps.

Before debt markets unraveled in 2007, prices of credit- default swaps, used to protect against losses and speculate on credit quality, assumed a 40 percent recovery rate. That compares with an average 9 percent rate since the start of December for unsecured senior bonds of bankrupt U.S. companies, according to Goldman Sachs Group Inc.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

The recovery rate for Rotterdam-based LyondellBasell’s debt is the lowest in Europe this year. The world’s biggest maker of polyolefins used in products ranging from bottle caps to auto parts, triggered default swap contracts when it failed to pay interest on 500 million euros of bonds.

To contact the reporter on this story: Michael Shanahan in London mshanahan3@bloomberg.net;

Last Updated: June 25, 2009 10:09 EDT