Tronox Finance LLC — Moody’s rates Tronox new term loan Ba2, outlook stable


Rating Action: Moody’s rates Tronox new term loan Ba2, outlook stableGlobal Credit Research – 23 Feb 2022New York, February 23, 2022 — Moody’s Investors Service (Moody’s) assigned Ba2 rating to the new senior secured $400 million 7 year term loan of Tronox Finance LLC (Tronox). Proceeds from the notes, along with balance sheet cash, are expected to be used to prepay Tronox Incorporated’s $500 million in outstanding global secured notes. The SGL-2 liquidity rating on Tronox Holdings Plc is unchanged and the rating outlook is unchanged at stable. »The financing is viewed as credit positive as it is expected to lower the company’s interest costs and to extend its maturity profile, » according to Joseph Princiotta, SVP and Moody’s lead analyst covering Tronox. « The new term loans are being issued under the existing credit agreement and will mature in 2029, one year beyond the current outstanding term loans, » Princiotta added. Assignments: ..Issuer: Tronox Finance LLC ….Gtd Senior Secured Term Loan, Assigned Ba2 (LGD2)RATINGS RATIONALEOn February 11, 2022 Moody’s upgraded Tronox’ Corporate Family rating to Ba3 from B1 and the ratings on Tronox Finance LLC’s senior secured term loan and cash flow revolver to Ba2 from Ba3. The upgrades reflect the strong performance and good progress in reducing debt by $745 million in 2021 to roughly $2.6 billion for the year ending December 31, 2021. Stronger industry prices in TiO2 pigment and the company’s feedstock advantage supported EBITDA and cash flow growth in 2021, with these favorable fundamentals expected to continue in 2022.Tronox Holdings Plc’s credit profile reflects the benefits from the company’s market position as one of the world’s largest titanium dioxide producers, industry leading vertical integration and co-product production, actual and prospective benefits from the Cristal acquisition, which provided good operating cost synergies and roughly doubled the company’s pigment production capacity and scale, and good liquidity. Tronox is the most back integrated into TiO2 raw materials and the impact of rising feedstock costs will be muted relative to peers. The credit profile also reflects heavy exposure to the cyclical titanium dioxide industry, which Moody’s believes is still in the early stages of a volume and pricing upcycle.Moody’s has a favorable outlook for TiO2 markets and expects strong demand growth against the backdrop of modest global supply additions to underpin favorable fundamentals, at least through 2022, allowing price support or further upward pressure on prices through the year and in all major regions. Low industry inventories combined with strong product demand and production closures in China have allowed for rising TiO2 pigment prices in all major regions in 2021 and into this year. There is some uncertainty as to the status and possible restart of the closed Chinese capacity, but a restart of this capacity is not expected to upset the upcycle conditions in TiO2 pigment.The credit profile and ratings also anticipate the impact on margins, cash flow and metrics from the next downcycle in the TiO2 space, which, although inevitable, is currently not anticipated for a while give the current favorable industry conditions and outlook. Trough conditions would result in metrics outside the normal boundaries for the rating category and concerns about free cash flow in the trough. Reduced debt levels, lower costs, improved profitability, back-integration and important projects underway should allow for performance superior to the last downcycle, according to Moody’s.Moreover, future benefits from the successful completion of the NewTRON and Atlas Campaspe projects should improve the company’s already favorable industry cost position. The NewTRON project, expected for completion by year end 2023, focuses on the company’s global digital transformation strategy and targets enhanced benefits of vertical integration, digitization and process optimization of the company’s global assets. The company is targeting $100-150 per ton cost improvement from this project.The Atlas Campaspe mining project in Australia is intended to replace capacity lost by operations at the Snapper Ginkgo mine, which is reaching the end of its useful life, and is expected to provide mining capacity in natural rutile, zircon, and high-grade ilmenite suitable for synthetic rutile or slag processing or for direct use in making pigment. The company expects $300 per ton support from this project compared to high grade feedstock prices.ESG CONSIDERATIONSESG risks and exposures are not a factor in today’s rating action and are not a significant factor in the company’s ratings at this time. Environmental exposure and costs for commodity companies can be meaningful, and even more so for TiO2 players. Approximately 87% of Tronox’s TiO2 production use the chloride process, which is a continuous process with lower energy requirements, produces less waste and is less environmentally harmful than the sulfate-based process. In July of 2021 the company set net zero GHG emissions and zero waste to landfill targets by 2050.Tronox assumed additional environmental exposure and costs as part of the Cristal acquisition and has booked a $56 million provision for environmental costs related to the remediation of residual waste mud and sulfuric waste deposited in a former TiO2 manufacturing site operated by Cristal from 1954 to 2011. The provision is significant but related expenditures are likely to spread over many years.Social risks are moderate but potentially increasing as the ongoing hearings between the EU Commission and the industry may result in tighter regulation for TiO2, the scope of which is not yet clear as there is still debate over the carcinogenicity of TiO2. As a public company, governance issues are viewed as modest and supported by what has thus far been communication of reasonable financial policies for the ratings category. The company targets unadjusted debt-to-EBITDA leverage in the 2-3 times range, which it has achieved ahead of its original schedule.LiquidityThe SGL-2 rating reflects good liquidity including $228 million cash balances and $449 million available under multiple revolving credit agreements as of December 31, 2021, including the company’s primary $350 million cash flow revolver that matures in 2027. In October 2021, the company, through its South African subsidiary — Tronox Mineral Sands Proprietary Limited — entered into an amendment and restatement of a new credit facility with Standard Bank which provides R1 billion (approximately $63 million at December 31, 2021 exchange rate) revolver due October 2026 and R1.5 billion term loan (approximately $98 million at December 31, 2021 exchange rate) facility due November 2026. The $350 million cash flow revolver contains a springing maximum first lien leverage ratio of 4.75:1.00 which will trigger if utilization exceeds 35% (less undrawn LCs and cash collateralized LCs). The term loan and bonds do not have any financial covenants. We expect Tronox to generate free cash flow in 2022.The stable outlook assumes TiO2 prices and volumes remain strong and support at least modest improvement in EBITDA and metric trends and positive free cash flow for the year, sufficient to fund and complete its projects underway. The stable outlook also assumes that the Cristal transaction continues to facilitate synergies and operational benefits and good liquidity is maintained.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGFurther progress towards improving the company’s performance ahead of the next industry downcycle, which could include further gross debt reduction to $2.0 billion, supported by an improved cost position from successful completion of the NewTRON and Atlas Campaspe projects, could support a higher rating. An upgrade would also be considered if expectations are for positive margins and free cash flow in the next trough, continued favorable trends and realization in acquisition benefits, and confidence that the company will maintain strong available liquidity.Moody’s would consider a downgrade if expectations or actual results show substantive fundamental weakening resulting in negative free cash flow anytime over the industry cycle. Moody’s would also consider a downgrade if the cycle in TiO2 turns down before the company is able to complete its projects, further reduce debt, if the company fails to realize or sustain a meaningful portion of operating synergies, or if adjusted financial leverage spikes to 5.0x, or if available liquidity falls below $300 million.Tronox Holdings Plc (Tronox), re-domiciled in United Kingdom in March, 2019. Including the acquisition of Cristal, Tronox is the world’s second largest producer of titanium dioxide (TiO2) and is the most backward integrated among the leading western pigment producers into the production of titanium ore feedstocks. It also co-produces zircon, pig iron and other products. The company operates nine pigment plants and eight mineral sands facilities globally. On February 23, 2021, Tronox announced that Exxaro Resources Limited (« Exxaro ») offered for sale 17 million shares (about 10% of the outstanding shares of Tronox as of December 31, 2020) in a secondary offering. At around that time Tronox also issued about 7 million shares to Exxaro in exchange for Exxaro’s 26% shareholding in the company’s South African operating subsidiaries which hold Tronox’s mining licenses. On March 1, 2021, Exxaro sold its entire share ownership in Tronox totaling about 22 million ordinary shares in an underwritten public offering. Tronox’s revenues were $3.57 billion for the twelve months ended December 31, 2021.The principal methodology used in this rating was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. 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Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Joseph Princiotta Senior Vice President Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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