Fitch downgrades Kronos Worldwide's IDR to BB- to reflect volatility of TiO2 market, frequency of stocking, destocking activity and related earnings volatility
May 13, 2013
– Fitch Ratings has downgraded the Issuer Default Rating (IDR) and senior secured term loan of Kronos Worldwide, Inc. (KRO) to 'BB-' from 'BB'. A complete list of rating actions is at the end of this release.
The ratings were downgraded to reflect the volatility of the titanium dioxide (TiO2) market and the frequency of stocking/destocking activity and related earnings volatility.
The Ratings Outlook is Stable.
KEY RATING DRIVERS:
Fitch's ratings reflect the company's solid market position (Top five globally) in the TiO2 industry, solid liquidity and modest debt levels combined with earnings volatility in the TiO2 industry.
TiO2 is used in pigments to provide whiteness, brightness, opacity and durability. The industry is fairly concentrated with 58% of the global market accounted for by the top five manufacturers. The titanium feedstock industry is also highly concentrated with the top three producers accounting for about 63% of supply. As feedstock contracts have come up for re-pricing, costs have accelerated more than TiO2 prices which has reduce margins from record levels in 2011.
Weaker economic growth and product substitution during a period of high prices has resulted in softer demand and prices. The TiO2 market is in a destocking phase which is resulting in lower capacity utilization and weak earnings as producers sell excess inventory and move high cost raw materials through cost of goods sold. In particular, Kronos Worldwide operated at 85% capacity utilization in 2012 versus 100% in 2011. Operating EBITDA for the second half of 2012 (2H'12) was $72 million compared to $352 million in the 1H'12 and $328.5 million in the 2H'11.
The company expects to run below 100% capacity utilization in 2013. Fitch expects operating EBITDA to be at least $75 million in 2013 and free cash flow (FCF) generation could be as low as negative $35 million in 2013 after capital expenditures and dividends estimated to aggregate $135 million. Scheduled debt maturities through 2018 will be largely comprised of the $20 million per annum due under the Contran Corporation loan.
At March 31, 2013, cash on hand aggregated $102.2 million of which $62.7 million was held by non-U.S. subsidiaries. The EUR120 million secured revolving credit facility is drawn seasonally and borrowings should be cleaned down following a peak in the second quarter. No borrowings are expected under the $125 million ABL facility. Fitch expects that total debt/EBITDA could be as high as 3.4x at the end of 2013 but could drop below 2.5x by the end of 2014.
The $125 million, five year asset based revolver is secured by receivables and inventory in North America. The facility has a 1:1 minimum fixed charge covenant at such times as availability is less than 10% but no other maintenance financial covenants.
The EUR120 million revolver at Kronos International is secured by the accounts receivable and inventory of the borrowers (operating subsidiaries). The facility currently expires in September 2017 and has a net secured debt to EBITDA maximum of 0.7x and net debt to equity minimum of 0.50 to 1 which is calculated at the operating subsidiary level. At March 31, 2013 on a U.S. dollar basis, $12.8 million was drawn under the facility and $140.5 million was available.
The term loan is secured by stock and a second lien on the U.S. receivables and inventory securing the asset based revolver. Given prepayment, the loan is due in full in June 2018. The facility has a maximum total leverage ratio (total debt net of cash up to $100 million to EBITDA) of 3.5x. The facility has been prepaid to $98 million with the proceeds of an unsecured loan from Contran Corporation and therefore no amounts are due until final maturity. The Contran Corporation loan amortizes at $5 million per quarter.
The Stable Outlook reflects Fitch's expectation that EBITDA returns to at least $150 million per annum with positive FCF after 2013. The company has sufficient liquidity and the ability to repay the term loan with additional proceeds from loans from Contran Corporation - its ultimate parent.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Expectation of sustained leverage above 3x;
--CFO less than $90 million in 2013.
Positive: Not anticipated over the next 12 months but future developments that may lead to a positive rating action include:
--Diversification of earnings from TiO2.
Fitch has taken the following rating actions at Kronos Woldwide, Inc.:
--IDR downgraded to 'BB-' from 'BB';
--ABL revolver affirmed at 'BB+';
--Term loan B downgraded to 'BB-' from 'BB'.
Fitch affirms the following ratings at Kronos International, Inc.:
--IDR at 'BB-';
--Senior secured revolving credit facility at 'BB+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 8, 2012.
Applicable Criteria and Related Research
Corporate Rating Methodology
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