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Rating Action:

Moody's Changes Tronox's Outlook to Positive

27 Mar 2018

Assigns B3 rating to new senior unsecured notes

New York, March 27, 2018 -- Moody's Investors Service, ("Moody's") affirms B1 CFR rating of Tronox Limited; assigns B3 rating to the new $615 million 8 year senior unsecured Notes issued by Tronox Incorporated. The proceeds of the transaction are expected to be used to repay the existing $600 million 7.5% senior notes due 2022 issued by Tronox Finance LLC. The outlook is changed to positive from stable.

"The positive outlook reflects the improvement in metrics, both on a stand-alone basis and pro forma for the acquisition of Cristal, from the upcycle in TiO2 and the expectation that metrics improve further as the outlook for TiO2 remains favorable and as free cash flow is used to reduce debt," according to Joseph Princiotta, Moody's VP, senior credit officer. "Moreover, the current financing, combined with the financings completed in October 2017, have improved the capital structure by pushing out maturities and lowering interest expense," Princiotta added.

Assignments:

..Issuer: Tronox Incorporated

....Gtd Senior Unsecured Regular Bond/Debenture, Assigned B3 (LGD5)

Outlook Actions:

..Issuer: Tronox Limited

....Outlook, Changed To Positive From Stable

..Issuer: Tronox Blocked Borrower LLC

....Outlook, Changed To Positive From Stable

..Issuer: Tronox Finance LLC

....Outlook, Changed To Positive From Stable

..Issuer: Tronox UK Holdings Ltd.

....Outlook, Changed To Positive From Stable

..Issuer: Tronox Incorporated

....Outlook, Changed to Positive from Ratings Withdrawn

Affirmations:

..Issuer: Tronox Limited

.... Corporate Family Rating, Affirmed B1

.... Probability of Default Rating, Affirmed B1-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

..Issuer: Tronox Blocked Borrower LLC

....Gtd Senior Secured Bank Credit Facility, Affirmed Ba3 (LGD3)

..Issuer: Tronox Finance LLC

....Gtd Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD5)

....Gtd Senior Secured Bank Credit Facility, Affirmed Ba3 (LGD3)

..Issuer: Tronox UK Holdings Ltd.

....Gtd Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD5)

RATINGS RATIONALE

The B1 CFR and the positive outlook reflect the benefits from the company's prospective market position as the world's largest titanium dioxide company, solid metrics for the B1 rating that are expected to improve going forward, vertical integration, prospective benefits from anticipated operating synergies, and good liquidity. The credit profile also reflects heavy exposure to the highly-cyclical titanium dioxide industry, expectations for significant weakening in credit metrics during future troughs outside the normal boundaries for the rating category, and integration risk associated with the acquisition of Cristal.

Completing the acquisition of Cristal will more fully leverage Tronox to the ongoing upcycle in the titanium dioxide industry and propel Tronox to be the world's largest titanium dioxide producer with a combined annual production capacity of 1.3 million metric tons across eleven production facilities in eight countries, excluding any changes to the asset base that might be required to satisfy antitrust regulators in the U.S or Europe. The deadline for closing the deal was recently extended to June 30, 2018, with the flexibility for "automatic" extensions to March 31, 2019, to allow time to negotiate with and satisfy regulators.

Moody's expects strong industry conditions to persist through the year and likely into next year as well, which should help the company reduce adjusted gross financial leverage to well below 4.0x (Debt/EBITDA) by year end 2018. Moody's expects the company to generate a minimum $400 million of free cash flow in the first twelve months post-acqusition, despite one-time spending to integrate the acquired business and assuming the acquisition of Cristal closes this year.

Management estimates net leverage of 3.5x on a pro forma basis for the acquisition of Cristal, while the capital structure includes significant bank debt that Tronox can pre-pay economically. Management mentioned on recent earnings conference calls that it intends to manage toward a long-term net leverage target of 2.0-3.0x and that it expects net leverage to reach 3.0x in 2019, which Moody's estimates is achievable with modest EBITDA growth and minimal debt reduction. It's important to note that net and gross leverage metrics are similar if the deal closes or not as the large cash balances earmarked for the acquisition are required to be applied to term loan reduction if the deal is abandoned.

Strong free cash flow generation during the upcycle in titanium dioxide could help Tronox reduce its overall debt load and better prepare it for the next down cycle. While management has commented that the next downturn likely will be less severe due to more disciplined behavior by industry participants under new ownership, the rating assumes conservatively that the next downturn could approach similar severity.

The Cristal acquisition further leverages Tronox to the upcycle, as mentioned. However, Tronox will also become more exposed to an eventual downturn due to the loss of the more stable soda ash business that generated between $130 and $150 million of EBITDA the past few years. Moody's estimates that the combined titanium dioxide platform would have generated less than $100 million of EBITDA in 2015 (ignoring merger synergies), compared to Tronox's estimate of $272 million including the soda ash business.

Tronox expects to realize substantial operating synergies from combining with Cristal, which is a very similar business, compared to owning Alkali Chemicals, a very different business acquired from FMC in 2015. Management expects to generate approximately $100 million in annualized synergies in year 1 and close to $200 million by year 3. The anticipated synergies could help make up the difference between the two trough-cycle EBITDA figures for 2015 cited above over the next two-to-three years.

The SGL-2 reflects good liquidity to support operations. Due to the sale of Alkali Chemicals, Tronox has $1.8 billion in cash and cash equivalents and restricted cash. While roughly $1.7 billion is expected to be used to close the Cristal acquisition, there is also a mandatory Term Loan prepayment of $1.45 billion if the acquisition is terminated, making the elevated cash balance temporary. Moody's expects Tronox to generate significant free cash flow in 2018, with the company unlikely to draw on its $550 million asset-based revolving credit facility. There are no financial maintenance covenants for the ABL and term loan, but the smaller South African revolver (roughly $60 million committed USD equivalent) contains net leverage and coverage covenants.

The positive outlook anticipates that favorable TiO2 conditions continue and the possibility that free cash flow is applied to debt reduction, strengthening the company's balance sheet and enhancing its financial flexibility ahead of the next down cycle, potentially supporting a higher rating category. The positive outlook also assumes that any changes to the Cristal deal valuation and resulting metrics will not change materially if certain assets are required to be sold to satisfy regulators, and that the company will maintain good liquidity through the medium term.

Moody's could downgrade the rating with expectations for substantive weakening in the titanium dioxide industry before the company is able to meaningfully reduce debt or demonstrate the realization of a meaningful portion of anticipated operating synergies. Given expectations for solid industry conditions over the next several quarters adjusted financial leverage above 5.0x beyond mid-2018 or available liquidity below $250 million could have negative rating implications.

Moody's could upgrade the rating with expectations for adjusted financial leverage to remain well below 6.0x during a cyclical trough or if the company reduces balance sheet debt to below $2.5 billion on a sustainable basis. An upgrade would also require comfort that the company will maintain at least $300 million of available liquidity on a through-the-cycle basis and a commitment to deleveraging.

The principal methodology used in these ratings was Chemical Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Tronox Limited (Tronox), with corporate offices in Stamford, CT, is currently the world's sixth largest producer of titanium dioxide (TiO2) and is backward integrated into the production of titanium ore feedstocks. It also produces electrolytic chemicals and byproducts of titanium ore processing (principally zircon). It operates three pigment plants located in Hamilton, Mississippi; Botlek, The Netherlands; and Kwinana, Australia; as well as mines and processing plants in South Africa and Australia. Tronox acquired the Exxaro mineral sands business (predominately titanium ore feedstocks) in a mostly equity-financed transaction in June 2012. Exxaro owned approximately 24% of Tronox as of December 31, 2017. Tronox also acquired FMC Corporation's soda ash business in April 2015 for $1.65 billion in balance sheet cash and raised debt, but divested the business for $1.325 billion in September 2017. Tronox's revenues were $1.7 billion for the twelve months ended December 31, 2017.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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