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Rating Action:

Moody's downgrades Tronox to Caa2 from B3, ratings remain under review with negative implications

01 Aug 2008
Moody's downgrades Tronox to Caa2 from B3, ratings remain under review with negative implications

Approximately $712 million of Debt Securities Affected

New York, August 01, 2008 -- Moody's Investors Service downgraded Tronox Worldwide LLC's (Tronox) Corporate Family Rating (CFR) to Caa2 from B3 the Probability of Default Rating (PDR) was lowered to Caa3 from B3. In addition, Moody's downgraded the company's secured revolver and term loan to B1 from Ba3 and its unsecured notes to Caa3 from Caa1. The speculative grade liquidity rating was affirmed at SGL-4. The rating remains under review with negative implications.

The two notch downgrade for the CFR (following a one notch downgrade in June of 2008) is due to the company's inability to effect meaningful price increases to offset rapidly increasing input costs that have caused operating margins to drop from 6% in 2006 to just below breakeven in 2007 and were still negative in the second quarter of 2008. This margin contraction is reflective of both poor conditions in the housing industry, which is an important end market for the coatings and PVC that use Tronox's TiO2, and the unprecedented rise in input costs. Tronox initiated cost control programs, starting in mid 2006, that have reduced cash costs by some $93 million cumulatively through June 30, 2008, without which Tronox's operating performance would have been significantly worse.

While the willingness of the banks to grant a waiver (and subsequent third amendment) and work with management to provide further covenant relief is positive for Tronox's liquidity, the need for such relief, reflecting weakness in its ability to generate free cash flow, continues to be a concern. Furthermore, Moody's is concerned that Tronox will need to adjust covenants further to maintain access to the facility in 2009. Moody's notes that due to uncertainties regarding the continued escalation of input costs and the global economic outlook, Tronox management is unable to predict, with a reasonable level of certainty, if the company will be able to achieve its financial covenants in the first half of 2009. As a result of Tronox's uncertainty accounting guidance requires that the company's long-term debt be reflected in current liabilities on the company's June 30, 2008 balance sheet.

Moody's believes that the ratings are constrained by the prospect of continuing weak operating performance, weakness in the housing market, covenant compliance and liquidity related pressures, and large legacy environmental liabilities (even as reserves on existing active sites have been reduced). Moody's believes that these legacy environmental liabilities are unique in size and complexity, and constitute a key negative factor when determining the rating.

Uncertainty over weakening economic conditions in North America along with one time charges was a driver for management's successful effort in July 2008 to reach agreement with its banks to amend its financial covenant's on its credit facility. This follows an earlier covenant amendment in February 2008 and March of 2007. Leverage ratios for the next three quarters of 2008 were relaxed by more than half a turn to a peak of 5.55 times (from 4.9 times) before reducing in 2009. In the second amendment interest coverage was dropped by over 1.5 turns to 1.0 times in the first two quarters of 2008 and to 0.80 times in the last two quarters before increasing in 2009. Tronox was in compliance with its new covenants in the second quarter of 2008. The proceeds from proposed asset sales were not factored into the setting of these covenant levels such that if successful the compliance headroom could improve. Still, the company's asset sale efforts in 2007 were delayed by both current capital market conditions related to commercial land sale financings and the inability to reach a satisfactory price on a sale of a foreign plant.

The ratings remain on review as Tronox has added specific new management and consultants to aid the company in evaluating all strategic alternatives to improve the business and address ongoing challenges, including development opportunities, mitigation of legacy liabilities, capital restructuring, land sales and all other options available to it. Specifically, Tronox has hired financial advisor Rothschild Inc. to further assist in its evaluation of strategic alternatives. Moody's ongoing review will attempt to gauge the chances that the company will be successful in pursuing alternatives and options or that the current price increases will offset the continuing cost increases. A further concern is Tronox's change in communication policy as noted on their recent second quarter conference call on July 30, 2008. As Tronox continues to evaluate strategic alternatives for improving their business and addressing the ongoing challenges the company faces, and given that these initiatives are still being developed, Tronox was not prepared, on the call, to answer questions regarding this process, the company's strategies or long-term outlook. Moody's believes this change in policy elevates the level of uncertainty surrounding the strategic alternatives being considered.

The review also reflects Tronox's weakening business profile as evidenced by the company's margin deterioration. While Moody's believes that Tronox is fundamentally a stronger credit over the medium term than the Caa2 CFR would imply, Moody's recognizes that Tronox has a sizeable market share, relatively modest debt maturities, positive geographic diversity, and stable customer relationships. Moody's is focusing more on the company's near-term performance due to the expectation of weaker credit metrics in 2008/2009 and Moody's anticipation that the company may need to renegotiate the recently amended financial covenants in its revolver and term loan to maintain access to these facilities over the next 12 months. It is this prospect of further covenant pressure along with reduced cash flows and lower cash balances that has resulted in the speculative grade liquidity rating of SGL-4 reflecting the prospect of weakening liquidity. A turnaround in the company's projected financial performance could result in a positive rating action. Conversely, weaker conditions in the company's main end-markets, coatings and PVC, resulting in weak product pricing and cash flows, could lead to lower ratings.

Downgrades:

Issuer: Tronox Worldwide LLC

Corporate Family Rating, Downgraded to Caa2 from B3

Probability of Default Rating, Downgraded to Caa3 from B3

Senior Secured Bank Credit Facility, Downgraded to B1 from Ba3 from Ba2, 9 - LGD1

Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3 from Caa1, 56 - LGD4

Speculative Grade Liquidity Rating, Affirmed at SGL-4

Tronox Worldwide LLC is the third-largest global producer of TiO2, a white pigment used in a wide range of products for its ability to impart whiteness, brightness and opacity. TiO2 is used in a variety of products including paints and coatings, plastics, paper and consumer products. The company commands a 12% global market share in TiO2, reporting sales of $1.5 billion for the twelve months ended June 30, 2008.

New York
William Reed
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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