TEXT-S&P affirms Kronos Worldwide ratings

Fri Jun 29, 2012 1:07pm EDT

Overview
     -- U.S.-based titanium dioxide (TiO2) producer Kronos Worldwide Inc., a 
subsidiary of U.S. holding company Valhi Inc., has revised its financing plan 
and lowered its term loan to $400 million from $600 million.
     -- We are affirming our 'BB-' corporate credit and issue-level ratings on 
Kronos and revising our recovery rating on its term loan facility to '3' from 
'4'.
     -- The stable outlook reflects our expectations that industry conditions, 
operating results, and cash flow will continue to support credit quality and 
that the company will not meaningfully increase debt leverage to fund growth 
or shareholder rewards.

Rating Action
On June 29, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' 
corporate credit and issue-level ratings on Dallas-based Kronos Worldwide Inc. 
The outlook is stable. At the same time, we revised our recovery rating on the 
company's debt to '3' from '4', indicating our expectation for a meaningful 
(50% to 70%) recovery in the event of a payment default. 

We are also withdrawing our 'BB-' corporate credit ratings on holding company 
Valhi Inc. and its subsidiary Kronos International Inc. following the closing 
of this refinancing transaction.

Rationale
The ratings on Kronos reflect the company's limited focus on the cyclical, 
commodity-based TiO2 market and very aggressive financial policies. We also 
view the company's concentrated ownership and complex corporate structure as 
limiting factors. However, the ratings also reflect our expectation that 
favorable industry conditions will support Kronos' financial profile, as well 
as our belief that the company's growth and shareholder rewards plans will not 
increase its debt leverage beyond our expectations for the ratings. We 
characterize the company's business risk profile as "weak" and its financial 
risk profile as "significant."

Based on our scenario forecasts, we expect Kronos' credit metrics to remain 
strong for the rating, with funds from operations (FFO) to adjusted debt 
greater than 60% over the next two years, compared with the 25% to 30% we 
expect for the ratings. We expect that global demand will support annual TiO2 
selling price increases of at least 10% over this period. Although we expect 
similar raw material feedstock price increases over this period, we expect 
TiO2 producers will be able to maintain EBITDA margins near current levels by 
passing through these costs. Our forecast also incorporates our expectation 
that the company will return a moderate amount of cash to shareholders while 
business conditions remain favorable.

The financial metrics of Kronos' parent, Valhi, have improved significantly in 
the past two years, with operating results benefiting from favorable industry 
conditions. As of March 31, 2012, its total adjusted debt to EBITDA was about 
1.2x, and the ratio of FFO to total adjusted debt was about 70%. As of March 
31, 2012, Valhi had about $780 million in total debt (adjusted for operating 
leases, environmental liabilities, and postretirement benefit obligations, and 
excluding loans from Snake River Sugar Co.), which does not change with the 
refinancing.

We do not expect the company's growth strategies or acquisitions to result in 
sustained additional debt or the deterioration of credit metrics. Valhi 
recognizes environmental liabilities of $55 million as of March 31, 2012. 
However, this figure does not include several sites for which the company 
cannot currently estimate costs.

Valhi is a holding company with about $2 billion in sales. It derives the bulk 
of its revenues (more than 90% in 2011) and operating profits from its 
majority ownership of Kronos, the world's third-largest producer of TiO2. 
Although Kronos derives more than 50% of its sales from Europe, exposure to 
weaker economies is limited, with more than 80% of European sales coming from 
Northern Europe and Germany.

The company's operating performance has improved primarily as a result of 
sequential increases in pricing within its TiO2 business. We expect Kronos to 
continue benefiting from tight supply and favorable pricing. For the next year 
or two, we expect revenue growth to come primarily from stronger pricing 
because the company has limited flexibility to increase production volume 
without meaningful capital spending. We also think continued price increases 
will enable the company to maintain product profit margins despite sharply 
rising raw material ore costs pressuring its margins over the coming year.

We expect Kronos' longer-term growth to reflect the overall economy and key 
end markets related to the housing and automotive sectors, as well as 
population growth and rising standards of living in emerging markets. Because 
of these factors, we expect Kronos to maintain profitability and to generate 
strong free cash flow over the next few years.

The TiO2 industry is fairly concentrated, with five producers accounting for 
more than 60% of global capacity. The industry experiences cyclical downturns 
when falling demand leads to supplyimbalances, and when raw material prices 
fluctuate. As a result, producers' financial results can swing significantly 
depending on economic conditions, the timing of new capacity additions, and 
the impact of rising raw material costs. Recently, operating results have been 
favorable, largely because of high industry capacity usage and improving 
demand, which have supported higher pricing. We expect these trends to 
continue for the next few years. However, over the longer term, new capacity 
additions (including one recently announced by industry leader E.I. DuPont de 
Nemours & Co.), could lead to a less favorable supply-demand relationship. 

Liquidity
We consider Kronos to have "adequate" liquidity and believe its cash sources 
will more than cover its cash needs over the next two years--even in the event 
of moderate, unforeseen EBITDA declines. Pro forma for the refinancing, the 
company has about $50 million in cash and equivalents and about $250 million 
available under committed credit facilities (on a consolidated basis). We 
expect the company to continue producing strong free cash flow over the next 
two years.

Relevant aspects of our assessment of the company's liquidity profile are as 
follows:

     -- We expect sources of liquidity to exceed uses by 1.2x or more over the 
next two years.
     -- We believe net sources would be positive, even with a 15% EBITDA 
decline.
     -- We believe the company has the ability to absorb low-probability 
shocks, based on its cash flow and available liquidity.


As a result of the refinancing, we believe debt maturities are manageable. The 
new term loan matures in 2018, and we expect the company will refinance Kronos 
International's revolving credit facility due 2013 well in advance of its 
maturity. The company also had approximately $109 million in underfunded 
obligations for its U.S. and foreign pension and pension-related obligations 
and $55 million in environmental and litigation-related liabilities as of 
March 31, 2012, which should be manageable.

Recovery analysis
For the complete recovery analysis, see our recovery report on Kronos 
Worldwide to be published on RatingsDirect following this report.

Outlook
The stable outlook reflects our expectation that Kronos will maintain its 
improved financial profile and "adequate" liquidity. We expect favorable 
industry conditions to support operating results and financial metrics over 
the next two years. We also expect that management will maintain a prudent 
approach to funding growth and shareholder rewards.

Based on our scenario forecasts, we expect Kronos to maintain financial 
metrics that are strong for the ratings. However, the highly cyclical, 
commodity-based nature of the TiO2 industry and the company's very aggressive 
financial policies limit the potential for higher ratings over the next year. 

We could lower the ratings if unexpected business obstacles--such as a drastic 
reduction in end-market demand or significantly higher-than-expected titanium 
ore price increases--reduce the company's EBITDA margin to less than 10%. At 
this point, we would expect FFO to total adjusted debt to decrease to less 
than 20%. We could also lower the ratings if the company uses additional debt 
to fund growth plans or shareholder rewards without an offsetting improvement 
to its business risk profile, or if environmental liabilities increase 
meaningfully as a result of additional accounting disclosure on remediation 
obligations.

Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011 
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009 
     -- Key Credit Factors: Business And Financial Risks In The Commodity And 
Specialty Chemical Industry, Nov. 20, 2008 

Ratings List
Ratings Affirmed

Kronos Worldwide Inc.
 Corporate Credit Rating                BB-/Stable/--      

Ratings Affirmed; Recovery Rating Revised
                                        To                 From
Kronos Worldwide Inc.
 Senior Secured                         BB-                
  Recovery Rating                       3                  4

Ratings Withdrawn 
                                        To                 From
Kronos International Inc.
Valhi Inc.
 Corporate Credit Rating                NR                 BB-/Stable/--

Kronos International Inc.
 Senior Secured                         NR                 B
  Recovery Rating                       NR                 5
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