-- 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
-- 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.
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.
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
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.
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
Relevant aspects of our assessment of the company's liquidity profile are as
-- 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
-- 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.
For the complete recovery analysis, see our recovery report on Kronos
Worldwide to be published on RatingsDirect following this report.
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
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
Kronos Worldwide Inc.
Corporate Credit Rating BB-/Stable/--
Ratings Affirmed; Recovery Rating Revised
Kronos Worldwide Inc.
Senior Secured BB-
Recovery Rating 3 4
Kronos International Inc.
Corporate Credit Rating NR BB-/Stable/--
Kronos International Inc.
Senior Secured NR B
Recovery Rating NR 5