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Rating Action:

Moody's affirms Tronox's subsidiaries ratings; changes outlook to stable from positive

27 Mar 2020

New York, March 27, 2020 -- Moody's Investors Service, ("Moody's") affirmed the ratings on existing Tronox Holdings Plc's (Tronox) subsidiaries ratings and changed the outlook to stable from positive. The Ba3 ratings on the senior secured bank debt and B3 ratings on the senior unsecured notes are also affirmed and the outlook changed to stable from positive. Ratings on Tronox Limited are being WR at this time and replaced with ratings assigned to Tronox Holdings PLC associated with the company's re-domicile to the UK. The change in outlook reflects what is now more likely to be a flatter or negative growth trendline for the TiO2 markets this year as the important end markets of coatings and plastics are also likely to be flatter or negative given the backdrop of uncertainty and actions related to Covid 19. The Speculative Grade Liquidity Rating is SGL-2.

"The previous positive outlook had anticipated sustained favorable conditions in TiO2 that would have allowed for EBITDA and free cash growth and further debt reduction for Tronox," according to Joseph Princiotta, SVP at Moody's. "This scenario is now viewed as less likely, and the more likely scenario would probably not allow for meaningful debt reduction this year, which underpinned the previous positive outlook and was needed to support consideration for a higher rating."

Assignments:

..Issuer: Tronox Holdings Plc

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

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

.... Corporate Family Rating, Assigned B1

Affirmations:

..Issuer: Tronox Finance LLC

....Senior Secured Term Loan, Affirmed Ba3 (LGD3)

..Issuer: Tronox Incorporated

....Senior Unsecured Notes, Affirmed B3 (LGD5)

..Issuer: Tronox UK Holdings Ltd.

....Senior Unsecured Notes, Affirmed B3 (LGD5)

Outlook Actions:

..Issuer: Tronox Blocked Borrower LLC

....Outlook, Changed To Rating Withdrawn From Positive

..Issuer: Tronox Finance LLC

....Outlook, Changed To Stable From Positive

..Issuer: Tronox Incorporated

....Outlook, Changed To Stable From Positive

..Issuer: Tronox Limited

....Outlook, Changed To Rating Withdrawn From Positive

..Issuer: Tronox UK Holdings Ltd.

....Outlook, Changed To Stable From Positive

..Issuer: Tronox Holdings Plc

....Outlook, Assigned Stable

Withdrawals:

..Issuer: Tronox Limited

.... Probability of Default Rating, Withdrawn , previously rated B1-PD

.... Speculative Grade Liquidity Rating, Withdrawn , previously rated SGL-2

.... Corporate Family Rating (Local Currency), Withdrawn , previously rated B1

RATINGS RATIONALE

Tronox's credit profile and current ratings (B1 CFR) reflect 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 acquisition synergies, and good liquidity. The credit profile also reflects heavy exposure to the cyclical titanium dioxide industry, expectations for significant weakening in credit metrics outside the normal boundaries for the rating category during a cyclical trough, concerns about free cash flow in the trough, and integration risk associated with the acquisition of Cristal.

Underlying demand is key to the outlook for prices and volume in TiO2 in 2020. Notwithstanding the company's favorable 1Q guidance versus consenus estimates, it's not clear what the global impact on TiO2 demand might be from Covid 19 for the balance of the year, particularly as the impact comes during the seasonally stronger second quarter and possibly the third quarter as well. Also, at the time of this writing there are price increases announced and pending by competitors in Europe and NA. The outcome of these proposed price hikes, which wont be known until June or July when current commitments expire, is uncertain but would likely fail if demand trends turn out negative and more than offset the favorable impact of supply outages over the next few months.

On the positive side, inventories in the industry have corrected and new global supply is limited, while Tronox' earnings will benefit from Cristal acquisition synergies. Supply outages in certain regions due to supply chain and worker challenges, or due to government closure mandates, could help fundamentals in the short run but might not be significant enough to offset any demand declines. Also, Tronox is the most back integrated into TiO2 raw materials and the impact of rising feedstocks will be muted relative to peers.

The SGL-2 rating reflects good liquidity including $302 million cash balances and $346 million available under the revolver as of December 31, 2019. On March 26, 2020 the company announced that it provided notice to draw down $200M under the revolver as a precautionary measure to increase liquidity and preserve financial flexibility. In March 2019, the company voluntarily reduced its $550 million asset-based revolving credit facility to $350 million due September 2022. Around the same time, through its South African subsidiaries -- Tronox KZN Sands Proprietary Limited and Tronox Mineral Sands Proprietary Limited -- Tronox established R1 billion (approximately $72 million at December 31, 2019 exchange rate) revolver due March 2022 and R2.6 billion term loan (approximately $186 million at December 31, 2019 exchange rate) facility due March 2024. We expect Tronox to generate free cash flow in 2020. There are no financial maintenance covenants for the ABL and term loan, but the ABL has a springing financial covenant which will trigger if availability falls below $40 million. The South African revolver contains net leverage and coverage tests, which would not trigger events of default and allow for cure periods.

The stable outlook assumes TiO2 prices and volumes don't deteriorate substantially from the impact of Covid 19, allowing flatish or only modest declines YOY in EBITDA, helped by acquisition synergies and sustaining some level of positive free cash flow for the year. The stable outlook also assumes that the Cristal transaction continues to generate target synergies and good liquidity is maintained through the medium term.

An upgrade would require that the favorable trends in acquisition synergies continue, and that the company maintains a commitment to deleveraging and reducing balance sheet debt to $2.5 billion or less ahead of the next trough and on a sustainable basis. An upgrade would also require confidence that the company will maintain at least $300 million of available liquidity.

We would consider a downgrade if expectations or actual results show substantive fundamental weakening resulting in negative free cash flow anytime this year. We would also consider a downgrade if the cycle in TiO2 turns down before the company is able to meaningfully reduce debt, or if the company fails to realize a meaningful portion of anticipated operating synergies, or if adjusted financial leverage remains above 5.0x, or if available liquidity falls below $250 million.

ESG Considerations

ESG risks and exposures do not have an impact on 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; the balance of 13% uses the sulphate process. The chloride process is continuous, has lower energy requirements, produces less waste and is less environmentally harmful than the sulfate-based production process.

Tronox assumed additional environmental exposure and costs as part of the Cristal acquisition. Tronox 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 rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We expect that credit quality around the world will continue to deteriorate, especially for those companies in the most vulnerable sectors that are most affected by prospectively reduced revenues, margins and disrupted supply chains. At this time, the sectors most exposed to the shock are those that are most sensitive to consumer demand and sentiment, including global passenger airlines, lodging and cruise, autos, as well as those in the oil & gas sector most negatively affected by the oil price shock. Lower-rated issuers are most vulnerable to these unprecedented operating conditions and to shifts in market sentiment that curtail credit availability. Moody's will take rating actions as warranted to reflect the breadth and severity of the shock, and the broad deterioration in credit quality that it has triggered.

For more information on research on and ratings affected by the coronavirus outbreak, please see moodys.com/coronavirus.

Tronox Limited (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. Tronox acquired the Exxaro mineral sands business (predominantly titanium ore feedstocks) in a mostly equity-financed transaction in June 2012. Pursuant to the terms of the share repurchase agreement with Exxaro in 2018, Tronox purchased roughly 14 million Tronox shares held by Exxaro in 2019 for approximately $200 million and lowering Exxaro's stake in Tronox from roughly 23% to 10.4%, as of December 31, 2019. Under the agreement, Exxaro has the right to sell its ownership in Tronox at any time. Tronox's revenues were $2.6 billion for the twelve months ended December 31, 2019.

The principal methodology used in these ratings was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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
Senior Vice President
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

Glenn B. Eckert
Associate Managing Director
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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