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Rating Action:

Moody's downgrades Chemours to Ba3, Outlook negative

27 Apr 2020

New York, April 27, 2020 -- Moody's Investors Service ("Moody's"), downgraded The Chemours Company's (Chemours) ratings, including the CFR to Ba3 from Ba2, the secured bank facilities to Ba1 from Baa3, and the senior unsecured rating to B1 from Ba3. The outlook on the ratings remains negative, reflecting the heightened and growing level of litigation risk stemming from actions filed by states, environmental regulators, water municipalities and private plaintiffs associated with perfluorochemicals (or PFAS), a family of chemicals used for decades to process a wide range of fluoropolymers. The Speculative Grade Liquidity Rating remains SGL-1.

"The downgrade reflects the growing PFAS case load, its impact on the potential ultimate liability, and other adverse developments associated with PFAS litigation" according to Joseph Princiotta, Senior Vice President at Moody's. " The downgrade also reflects profit pressures in flouroproducts and TiO2 and the resulting stress to metrics and cash flow this year," Princiotta added.

Downgrades:

..Issuer: Chemours Company, (The)

.... Corporate Family Rating, Downgraded to Ba3 from Ba2

.... Probability of Default Rating, Downgraded to Ba3-PD from Ba2-PD

....Senior Secured Bank Credit Facility, Downgraded to Ba1 (LGD2) from Baa3 (LGD2)

....Senior Unsecured Regular Bond/Debenture, Downgraded to B1 (LGD5) from Ba3 (LGD4)

Outlook Actions:

..Issuer: Chemours Company, (The)

....Outlook, Remains Negative

RATINGS RATIONALE

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. The chemical sector in general, and the flouroproducts and TiO2 subsectors in particular have been affected by the shock, especially the auto OEM producers and certain industrial end markets given the sensitivity consumer demand and economic activity. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action, in part, reflects the impact on Chemours of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

While there have been no new PFAS settlements or court decisions that would allow better dimensioning or quantification of the potential liability, the case load continues to grow and negative developments and news flow continues on this topic; Moody's expects this trend to continue. At the time of our last rating action in July of last year, for instance, there were 4 states that had filed Natural Resource Damage (NRD) cases against DuPont ("DuPont de Nemours, Inc."), Chemours and other defendants; that case load today has increased by 2 states -- New York and Michigan -- to 6. Other cases representing multiple defendants had been filed by private, municipal and government plaintiffs in New Jersey, Georgia, Long Island and other jurisdictions.

Meanwhile, firefighting foam litigation continues to grow and law suits filed in other States have been rolled into the MDL in South Carolina federal court. Also, representatives of about 31,000 rural utilities filed suite last month to recover the costs to clean up PFAS in groundwater resulting from the use of firefighting foam products. DuPont and Chemours never manufactured these foam products, but they made a foam ingredient. The company reports that an AFFF case in Alaska was recently dismissed.

In addition, Chemours lawsuit against DuPont, seeking indemnification caps and return of the 2015 spin-related dividend, was recently dismissed in Delaware Chancery Court, sending the dispute back to arbitration, where Chemours is unlikely to fare as well as it possibly could have in litigation, in Moody's opinion. Chemours is appealing the decision, but Moody's believes the ultimate resolution will be a settlement between DuPont and Chemours, with Chemours likely baring the brunt of the PFAS costs over the next few years.

In addition, 2 of the 61 pending personal injury cases in the southern district of Ohio recently concluded, one in a hung jury and the other with a $50 million jury award, but the latter is subject to dismissal or appeal motions by DuPont. Six other personal injury cases are on the docket in Ohio this year, but Covid-19 has stalled trials and other legal matters.

Meanwhile, the EPA is moving forward with its PFAS Action Plan and in February 2020 announced its intent to designate PFOS and PFOA as hazardous substances, which would provide clean up authority and standards and set maximum contaminant levels, with the result likely to increase the number of cleanup sites, cleanup costs and the pace of clean-up to involved companies like Chemours and DuPont.

The downgrade also reflects weakness expected this year in the flouroproducts segment, which has become Chemour's largest segment in terms of EBITDA, stemming from weak auto OEM markets and from the ongoing pressure on Opteon auto refrigerant demand and prices due to persistent black market competition in these markets. The auto OEM markets were weak coming into the year, but the situation and outlook weakened further by closures of auto manufacturing plants and from the jump in unemployment and consumer uncertainty, all the result of Covid-19.

While the outlook for TiO2 remains better than most commodities in this environment, EBITDA levels are more likely to be flattish or down this year. TiO2 markets came into the year with favorable fundamentals and the potential for upside in volumes and prices. However, the current situation is one of uncertain demand in the near term, although demand into certain coatings and plastics markets has held up reasonably well thus far. Meanwhile TiO2 producers are pushing for price increases to attempt to offset cost pressures from higher ore prices; the success of these price hikes will be a big factor in the trendline for TiO2 EBITDA this year.

Chemours' credit profile reflects Chemours' position as a leading global producer in TiO2 pigments, where scale, technology and more flexibility allow for industry-leading margins, currently and over the cycle. Its profile also reflects leading market positions across much of the fluoroproducts branded franchise, which continues to have a favorable secular growth outlook from Opteon, notwithstanding the current black-market pressures. Chemours is a leader and one of only two major producers in the new HFO generation of low global warming refrigerant products.

Chemours' credit profile also reflects the modest stress in balance sheet leverage which is currently above 4x (on a gross adjusted basis) and expected to increase this year, and modest positive free cash flow, both of which have declined since 2018 due to softness in TiO2 markets outside the US and loss of market share, and from black market pressures offsetting secular growth in flouroproducts. The credit profile also reflects high gross debt levels of over $4.0 billion, roughly unchanged since the 2015 spin, and limited diversification as TiO2 and fluoroproducts account for nearly all of the company's EBITDA.

Other negative factors in the credit, aside from the litigation, include the historical cyclical nature of the TiO2 industry, which was recovering from an inventory cycle prior to the Covid-19 impact in demand, The company's Ti-Pure Value Stabilization initiatives, which target price visibility and volume assurance to customers who participate, is intended to smooth the effects of cycles, but its implementation led to market share losses last year.

ESG factors are material in the credit profile and a main driver of the rating action today. The downgrade and negative outlook reflect the substantial and growing litigation risk stemming from the growing number of actions filed by states, environmental regulators, water municipalities and private plaintiffs associated with perfluorochemicals (or PFAS), a family of chemicals used for decades to process a wide range fluoroproducts.

Lawsuits recently filed include Natural Resource Damage suits (NRDs), which allege environmental damage and seek to recover remediation costs, by attorney generals in New Jersey, Ohio, New Hampshire, New York, Michigan and Vermont; lawsuits filed by public water suppliers in North Carolina, private suits filed in New Jersey, New York, Long Island, Georgia and other jurisdictions, personal injury cases pending in Ohio, and a growing number of fire-fighting foam cases filed in a number of states and consolidated in the multi district litigation (MDL) in South Carolina federal court.

Chemours' SGL-1 rating indicates excellent liquidity and reflects the company's ability to meet 100% of its internal needs from cash and cash flow; On April 8, 2020, as a precautionary measure to address macroeconomic uncertainty driven by the coronavirus outbreak, the company drew down approximately $300 million of its $800 million revolver due April 2023. The revolver has a maximum secured Net Debt/EBITDA ratio of 2.0x and a springing maturity inside the existing 2023 bonds. We expect the company to be in compliance with covenants over the next 12 months. The TLB does not have maintenance covenants. As an additional source of liquidity, Chemours entered into an $125 million accounts receivable securitization facility (with an option to increase to $200 million) in July 2019 and amended and restated this facility in March 2020. The facility had approximately $110 million borrowings as of December 31, 2019 but has since been repaid to zero.

Working capital typically consumes cash in the first half of the year, but is a significant source of cash in the second half and could be applied to TLB reduction, dividends and share repurchases. As of December 31, 2019, cash balances were $943 million.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The negative outlook reflects growing litigation risk and potential future costs associated with PFAS water contamination and other related costs. Given the longer tail nature of this risk and the costs that might result, it's possible that the negative outlook might extend beyond the usual 18 months observation period beginning with today's action.

Moody's would consider a downgrade if PFAS litigation begins to result in adverse trial outcomes and significant costs, if settlements with States, municipalities or other plaibntiffs result in expensive agreements, or if litigation emerges from a number of other government entities, municipalities or private parties. A downgrade would also be considered if cash balances and liquidity were to deteriorate, or if Debt/EBITDA were to exceed the 4.5x range, or if RCF/Debt falls to single digits, on a sustainable basis.

Moody's would not consider an upgrade until there is better clarity with respect to this litigation and all associated costs. If this risk were to dissipate, Moody's would consider an upgrade if gross adjusted Debt/EBITDA were sustained below 3.5x and RCF/Debt remained above 20%, both on a sustained basis.

Chemours Company (The), headquartered in Wilmington, Delaware, is a leading global provider of performance chemicals through three reporting segments: Titanium Technologies, Fluoroproducts and Chemical Solutions. Revenues for the last twelve months ended December 31, 2019, were roughly $5.5 Billion.

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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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