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02 Nov 2005
MOODY'S ASSIGNS Ba2 TO TRONOX'S SENIOR SECURED BANK FACILITY AND B1 TO PROPOSED SENIOR NOTES
$800 Million of Debt Rated
New York, November 02, 2005 -- Moody's Investors Service assigned a Ba2 rating to the $450 million
of senior secured credit facilities of Tronox Worldwide LLC (Tronox),
an Oklahoma-based company. The senior secured credit facilities
consist of a $200 million 6-year secured, term-loan
and $250 million five-year, secured revolver.
A proposed $350 million seven-year senior unsecured note
has been assigned a B1 rating. The corporate family rating of Tronox
is Ba3. The ratings reflect the company's position as a leading
producer of titanium dioxide (TiO2) -- with 13% global market
share -- and relatively modest debt burden. These positives
are offset by weak historical operating performance and the presence of
an unusually large number of legacy environmental liabilities.
The ratings assigned are subject to a complete review by Moody's
of the final credit facility and senior note documents and are also subject
to the transactions being closed in a manner and with terms that are substantially
identical to those that have been shared with Moody's. This
is the first time that Moody's has rated the debt of Tronox; the
outlook is stable.
The credit facilities and the senior debt are guaranteed by Tronox's
parent, Tronox Incorporated ("Holdco") as well as all material domestic
subsidiaries. Proceeds from the term-loans, the notes
and the proposed initial public offering (IPO) of Holdco will be distributed
to Holdco's parent, Kerr McGee Corporation (KMC - Ba3 Corporate
Family Rating). Holdco is an unrated indirect subsidiary of KMC
and KMC is expected, over the near term, to retain majority
control of Holdco, and hence Tronox, after the date of the
initial IPO. Over the intermediate term Moody's believes
that KMC's ownership will likely decrease significantly and thus
there is no material rating benefit to Tronox debt holders derived from
KMC's ownership position.
Tronox Worldwide LLC
$250 million five-year, guaranteed, secured,
revolver -- Ba2
$200 million six-year, guaranteed, secured,
term-loan -- Ba2
$350 million seven-year, guaranteed, senior
note -- B1
Corporate family rating -- Ba3
Moody's views Tronox's strong position as a geographically diverse
Ti02 manufacturer as its primary credit strength. In addition,
the Ba3 rating recognizes Tronox's solid market positions and its stable
customer relationships. We believe Tronox operates in a reasonably
steady business that exhibits growth potential that is a function of global
GDP growth rates. Furthermore Moody's believes that the debt
structure, as presented, provides a reasonable amount of financial
flexibility to Tronox.
Still, the Ba3 corporate family rating also reflects the company's
operating losses from continuing operations over the last three years.
These losses resulted, in part, from material restructuring
activities in 2004 and 2003 totaling some $174 million that created
losses from continuing operations before taxes over the last two years
of $183 million. Absent these restructuring charges Tronox's
performance over the last two years was essentially break even.
However, Moody's recognizes that even with restructuring expenses
and cash payments for legacy liabilities Tronox, has been able to
generate free cash flow over the last several years (albeit without a
material debt burden).
Moody's recognizes that Tronox's TiO2 business is currently
benefiting from an improving operating environment in 2005 that has led
to some price improvements. Notwithstanding the current positive
momentum in TiO2, the proposed company is being levered with debt
during a near 20 year peak in TiO2 pricing. However, despite
recent price increases experienced in the market, current prices
are still below the long term trend.
The anticipated funded debt of $550 million, which represents
a 2.5 times LTM June 30, 2005 (estimated) adjusted EBITDA
multiple, will add to Tronox's debt and financing costs.
Moody's Standard Analytical Debt adjustments add another $125
million to Tronox's debt balances. Additionally, Tronox's
weak operating performance in the last several years, notwithstanding
the nature of the restructuring actions, makes Moody's wary
of assuming that operating margins will dramatically improve from current
levels. Moreover, we see Tronox largely as a single product,
commodity like, business that carries a higher risk than a more
Moody's believes that Tronox's legacy environmental liabilities,
which are in addition to those associated with Tronox's primary
business, are a key negative factor when determining the rating.
These liabilities are unique in size and complexity. Tronox will
have liabilities relating to the remediation of various sites at which
chemicals such as creosote, perchlorate, low-level
radioactive substances, asbestos and other materials have been used
or disposed. Tronox's financial condition and results of
operations could be adversely affected by these liabilities and Tronox
could suffer losses as a result of these liabilities even if the primary
business performs well. As of June 30, 2005, Tronox
has reserves in the amount of $259 million for environmental remediation
and restoration up from $216 million at December 31, 2004.
Moody's recognizes that there is a level of concentration in these
liabilities as well as the presence of some potential reimbursements along
with a long lived history and track record of addressing these issues.
Nevertheless, we are cautious as to the assumption that the net
cash requirements are likely to rapidly diminish in the next few years.
Additions to the reserves are likely to be required as additional information
is obtained that enables Tronox to better estimate its liabilities,
including liabilities at sites now under review. However it is
difficult to reliably estimate a range of future additions to the reserves
for any individual site or for all sites collectively. In future
periods, a number of factors could significantly change estimates
of environmental remediation costs, such as changes in laws and
regulations, revisions to the remedial design, unanticipated
construction problems, identification of additional areas or volumes
of contamination, and changes in costs of labor, equipment
Tronox's stable outlook considers the strength of its franchise in terms
of its market positions and long-lived customer relationships,
and is supported by the relatively modest leverage of its balance sheet.
If operating performance is weaker than anticipated or a material increase
in environmental liabilities were to occur, the outlook or rating
could turn negative. To the extent that Tronox reduces debt faster
than expected, such that debt/EBITDA metrics improve to under 1.5X
times or less on a permanent basis or if environmental liabilities were
deemed to be much improved a positive change in outlook or rating could
Structurally, the Ba2 assigned to the credit facilities reflects
their senior secured position in the capital structure. Asset coverage
in a distressed scenario does provide the support necessary to move the
rating to Ba2 given its secured position. Moody's views the level
of asset coverage in a distressed scenario as adequate. The credit
facility will be guaranteed by Holdco and Tronox's direct and indirect
material domestic subsidiaries. Specifically, the credit
facility will be secured by a pledge of 100% of the equity interests
in Tronox along with a pledge of 100% of the capital stock of,
or other equity interests in, Tronox's direct and indirect
domestic subsidiaries. The credit facility will also be secured
by a pledge of the capital stock of, or other equity interests in,
Tronox's direct foreign subsidiaries and the direct foreign subsidiaries
of the guarantors of the senior secured credit facility, up to 65%
of the voting and 100% of the non-voting capital stock or
other equity interests outstanding; and a first priority security
interest in certain domestic assets of Tronox and the guarantors of the
senior secured credit facility. The senior notes are rated B1,
a notch lower than the Ba3 corporate family rating, reflecting their
unsecured position in the capital structure and potential for loss in
a default scenario.
Tronox, headquartered in Oklahoma City, Oklahoma, is
a leading manufacturer of TiO2.
TiO2 is a white pigment used in a wide range of products for its exceptional
ability to impart whiteness, brightness and opacity. Sales
for the last twelve months ending December 31, 2004 were $1.3
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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