Kronos Worldwide rating outlook at stable: Fitch

Kronos Worldwide rating outlook at stable: Fitch

5:54 AM, 12th May 2017
Kronos Worldwide rating outlook at stable: Fitch
The headquarters of Fitch Ratings in London, UK. (File photo)

CHICAGO, US: A report from Fitch Ratings Inc has stated the issuer default ratings (IDRs) of Kronos Worldwide Inc (KRO) and its wholly owned subsidiary, Kronos International Inc at 'B+'. The rating outlook is stable.

Kronos' ratings reflect its low leverage, low capex requirements and a relatively conservative financial strategy that has seen the company's capital structure largely unchanged for a number of years. The company's small size and leverage to the TiO2 industry are credit concerns but Fitch's expectations for a continued recovery in TiO2 should lead to consistent FCF that should enable Kronos to add to its liquidity position over the coming years.

Key rating drivers

Titanium dioxide (TiO2) price recovery: Fitch expects global TiO2 supply to be more balanced in 2017 due to notable closures over the last two years that have helped thin the global supply glut. The recent fire at Huntsman's Pori, Finland plant has further tightened markets as the 130,000-tonne plant produced a highly-specialized sulphate pigment that is not easily replicated by other TiO2 producers.

Exposure to raw material prices: Kronos purchases chloride process grade slag and natural rutile ore as well as ilmenite for its Canadian sulphate plant under long-term supply contracts leaving it exposed to third-party suppliers for at least 75 percent of its feedstock requirements. Fitch expects prices for both sulphate and chloride TiO2 feedstock to follow pigment prices directionally over the medium term with a recovery in the feedstock market becoming more pronounced by 2018.

Additionally, Fitch projects that ore pricing pressure will be limited due in part to the recent consolidation within the pigment industry as well as noteworthy spinoffs of top players such as Chemours and the soon-to-be Venator Materials Corp.

Fitch believes these transactions will lead to an increase in market transparency within TiO2 that will strengthen the bargaining power of western pigment producers with feedstock suppliers. The Tronox/Cristal merger will also remove a large ore purchaser from the global marketplace as the new entity will be 85% backwards integrated into titanium ore compared to Cristal previously purchasing the majority of its TiO2 feedstock on the open market.

Concentrated market: The global TiO2 market is relatively concentrated among a handful of top producers. Pro forma the pending Tronox/Cristal merger, Fitch estimates the top five TiO2 producers account for around 60 percent of global capacity. While Kronos believes, it has leading market positions in both Europe and North America, the company has limited ability to impact market dynamics. Despite management's belief that it is the largest TiO2 producer in Europe, the company's EBITDA generation at its European facilities has been limited the past several years, which has restricted capacity under its European facility due to the facility's financial covenants.

Modest debt load: Fitch views Kronos' current debt load as modest when compared against Fitch's view of a normalised operating EBITDA for the company. Leverage is forecasted to fall below 1.5x by the end of the current fiscal year and should stay around that level through 2019. Additionally, the company's upcoming maturity payments are light, limited to the amortisation of its term loan, which comes due in 2020. Fitch projects Kronos will be able to favourably refinance the term loan prior to its maturity date.

Recovery ratings: Fitch used a going concern EBITDA of $100 million for its recovery analysis and a 5x multiple, which results in a calculated enterprise value in a distressed scenario of around $500 million. Fitch's going concern EBITDA reflects the volatile and highly competitive nature of the TiO2 industry, which, in a stress scenario, would likely lead to pricing pressure that would shrink Kronos' earnings.

Fitch has upgraded Kronos Worldwide Inc's term loan to 'BB' and has revised the recovery rating to 'RR2' from 'RR3'. Fitch believes the instrument will have superior recovery prospects (71-90 percent) in a distressed scenario. The revised Recovery Rating reflects Fitch's assumption that drawings under Kronos' two revolving credit facilities would be limited in a distressed scenario leaving less than the full committed amount available to be drawn for each facility and increasing the projected recovery proceeds the term loan would receive.

Derivation summary

Kronos is 100 percent levered to TiO2, with no other business segments to offset the risk in the pigment industry. Kronos will be the smallest western producer of TiO2 on a total capacity basis and will be unable to exert any notable influence on market dynamics when compared to peers such as Chemours, Tronox/Cristal and Venator.

Key assumptions

Fitch's key assumptions within our rating case for the issuer include:

  • TiO2 prices continue to rise through 2017 and into 2018, moderating thereafter;
  • Kronos' plants run at full stated capacity in 2017, with 2017 sales volumes matching 2016 levels. Sales volumes gradually decline thereafter as plant utilisation rates settle around the 95-96 percent range;
  • TiO2 feedstock prices relatively flat year over year in 2017, but price recovery starts in the second half of 2017 and continues through 2018 before moderating in 2019;
  • Capital expenditures and dividend payments consistent with historical averages.

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