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Rating Action:

Moody's affirms Venator's B1 rating, changes outlook to stable

29 Jan 2019

New York, January 29, 2019 -- Moody's Investors Service ("Moody's") affirmed Venator Materials plc's (Venator) ratings at B1 and changed the outlook to stable from positive. Moody's also affirmed Venator Materials LLC's Ba3 rating on the senior secured term loan B, and the B2 rating on Venator Materials Corporation's senior unsecured bonds. The change in outlook reflects the lack of debt reduction, (a key upgrade trigger since the rating and positive outlook were assigned back in 2017) the likelihood that the company will be unable to reduce debt in 2019 due to the ongoing expenditures for the Pori plant restructuring and related costs, and expectations of lower EBITDA for the year.

"To maintain the current rating and outlook, debt reduction is needed before the upcycle in TiO2 ends to better position Venator ahead of the next TiO2 downcycle," according to Joseph Princiotta, VP and Senior Credit Officer covering Venator. "Moody's believes the end to the upcycle could still be several years away but there are risks to this outlook including softer demand if key economies were to weaken, or in the event of an extended inventory destocking cycle, which is currently underway."

Outlook Actions:

..Issuer: Venator Materials Corporation

....Outlook, Assigned Stable

..Issuer: Venator Materials LLC

....Outlook, Changed To Stable From Positive

..Issuer: Venator Materials plc

....Outlook, Changed To Stable From Positive

Affirmations:

..Issuer: Venator Materials Corporation

....Senior Unsecured Regular Bond/Debenture, Affirmed B2 (LGD5)

..Issuer: Venator Materials LLC

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

..Issuer: Venator Materials plc

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

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

.... Corporate Family Rating, Affirmed B1

RATINGS RATIONALE

The rebuild of the Pori, Finland TiO2 plant, which was heavily damaged by fire in January, 2017, has not gone well in terms of costs or timing and the company has abandoned plans to rebuild the plant, choosing to operate it at 26,000 tons of the 130,000 ton plant capacity. The lost tonnage reduces total capacity by about 13%. Insurance proceeds of $551 million received in 2017 and 2018 for plant damage and business interruption have supported liquidity, EBITDA and repair costs to date; but the repair expenditures plus closure and capacity transfer expenditures, along with cash use for normal capex, working capital, restructuring, and pensions have exceeded internal cash generation and is reducing cash balances. Moody's outlook for free cash flow is better in 2019 as the Pori closure and transfer costs and other cash uses are expected to decline versus 2018. However, free cash flow might still be neutral or slightly negative, depending on working capital release for the year, EBITDA and the strength of the TiO2 markets through the year.

Moody's remains optimistic that the upcycle in TiO2 has staying power over the next several years, assuming global demand growth trends remain favorable with limited new supply contemplated or under construction, including the Lomon Billions project in China and Chemours' debottlenecking efforts. However, in the short term, Moody's expects price and volume pressure in the TiO2 markets over the next few quarters due to elevated inventory levels. The weaker markets commenced in the third quarter of last year and are likely to extend through much of 2019; it could take until mid-year or longer for industry destocking to run its course, Moody's believes. Under this scenario, Moody's expects Venator's EBITDA to decline to the $240-$260 range in 2019, then rebound in 2020 as favorable industry fundamentals reassert themselves.

The rating currently benefits from top-cycle credit metrics for the B1 rating, market position as the world's third largest titanium dioxide producer with a strong presence in specialty products, earnings diversity from the additives business, prospective benefits from a business improvement program, and adequate liquidity. However, the rating incorporates expectations for significant fluctuations in market conditions, and therefore key credit metrics in this highly cyclical industry.

Venator's credit profile is principally constrained by heavy exposure to the highly cyclical titanium dioxide industry, which is currently facing high inventories and a destocking environment which needs to run its course before favorable fundamentals can be restored. Inevitably, industry conditions will weaken and credit metrics will probably decline significantly, outside the normal boundaries for the current rating category. Hence, some debt reduction is needed and anticipated during the upcycle to prepare for the next trough.

Venator commenced operations as an independent company with $750 million of secured and unsecured debt, and access to an undrawn $300 million asset-based revolving credit facility. Moody's believes that the company would be challenged to maintain reasonable credit metrics for the B1 CFR during a significant industry downturn reminiscent of what the industry experienced prior to the start of price recovery in early 2016.

Although the company has publicly stated a $350 million net debt target before instituting share buybacks, it's uncertain what this means precisely for a gross debt level. Adjusted gross financial leverage is 1.7x for the twelve months ended 30 September 2018, which includes income related to insurance recoveries, and includes our standard adjustments mostly for underfunded pension plans and modestly lower add-backs compared to management calculations. Net leverage was 1.3x at the end of the quarter.

The SGL-2 Speculative Grade Liquidity Rating ("SGL") indicates good liquidity to support operations in the near-term with $251 million in cash, as of September 30, 2018. Venator is expected to generate nuetral or slightly negative free cash flow in 2019 and has access to a $300 million asset-based revolving credit facility. However, the company does not have full access to the facility due to borrowing base restrictions. The credit agreement contains a springing fixed charge coverage ratio test that does not become effective unless excess availability falls below 10% of the facility. We do not expect the covenants will be tested in the near-term and believe that the covenant lite structure is well-aligned with the cyclicality of the company's business over a longer horizon.

The stable outlook anticipates that favorable industry fundamentals are sustained after the inventory destocking period runs its course, supported by assumptions for continuing demand growth globally, allowing time for Venator to reduce gross debt to $600 million or less to support the B1 ahead of the next downcycle.

Moody's would be unlikely to consider an upgrade given this highly cyclical industry and the company's relative margin today and performance in the previous industry downcycle. However, if debt were to be meaningfully reduced below $600 million, Moody's might consider an upgrade.

Moody's could downgrade the rating with expectations for substantive weakening in the titanium dioxide industry before the company is able to start repaying debt or substantive deterioration in prospects for free cash flow generation. Given expectations for solid industry conditions over at least the next several quarters, adjusted financial leverage above 4.0x beyond the end of 2019 or available liquidity below $200 million could have negative rating implications.

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.

Headquartered in the United Kingdom, Venator Materials plc is the world's third-largest producer of titanium dioxide pigments used in paint, paper, and plastics, and a producer of performance additives for a wide variety of end markets. Venator was created through an IPO transaction from Huntsman Corporation. Venator generated approximately $2.3 billion in revenues for the twelve months ended 30 September 2018.

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 - Sr 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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