Fitch Ratings has affirmed and revised the Ratings Outlooks for the
'BB-' Issuer Default Ratings (IDRs) for Kronos Worldwide, Inc. (NYSE:
KRO) and Kronos International, Inc. to Negative from Stable. A complete
list of ratings actions is at the end of this release.
The rating action follows weaker than expected earnings in 2013 and the
possibility of weak operating cash flows for 2014. Fitch had expected
operating EBITDA of at least $75 million for the year compared to a
preliminary 2013 Adjusted EBITDA loss of $38 million. Fitch had expected
cash flow from operations (CFO) to exceed $90 million in 2013, which is
likely to have been exceeded with liquidation of working capital.
Key Ratings Drivers:
Fitch's ratings reflect the company's solid market position (Top 5
globally) in the titanium dioxide (TiO2) industry, adequate liquidity,
and modest debt levels combined with earnings volatility in the TiO2
industry.
TiO2 is used in pigments to provide whiteness, brightness, opacity and
durability. The industry is fairly concentrated with 58% of the global
market accounted for by the top five manufacturers. The titanium
feedstock industry is also highly concentrated with the top three
producers accounting for about 63% of supply.
The TiO2 market has been in a destocking phase which resulted in lower
capacity utilization and weak earnings as producers sell excess
inventory and move high-cost raw materials through cost of goods sold.
In particular, Kronos Worldwide operated at 90.1% capacity utilization
in 2013 versus 85% in 2012 and 100% in 2011.
Guidance:
The resolution of the lock-out in Canada should allow operations to
approach full capacity in 2014. In its Jan. 30, 2014 announcement, the
company stated that if 2013 results reflected the company's current cost
of third-party feedstock ore procured, Adjusted EBITDA would have been
approximately $218 million higher than amounts expected to be reported.
The company announced that its average TiO2 selling prices in the fourth
quarter of 2013 (4Q'13) are expected to be 1% higher than 3Q'13 but 10%
lower than 4Q'12.
Expectations:
Fitch expects capital expenditures and dividends to aggregate $135
million per annum. Scheduled debt maturities through 2018 largely
comprise the $20 million per annum due under the Contran Corporation
loan. In its announcement, the company stated that it was exploring the
possibility of accessing the debt capital markets. Fitch expects maximum
borrowings of $300 million.
Fitch had expected EBITDA to return to at least $150 million per annum
with positive free cash flow after 2013. The Negative Rating Outlook
reflects the possibility that free cash flow generation will be
challenged.
Adequate Liquidity:
At Sept. 30, 2013, cash on hand aggregated $59.8 million - the bulk of
which was held by non-U.S. subsidiaries.
The $125 million, five-year asset based revolver is secured by
receivables and inventory in North America. The facility has a 1:1
minimum fixed charge covenant at such times as availability is less than
10% but no other maintenance financial covenants. The facility was drawn
in 2013 to repay the term loan and at Sept. 30, 2013, $46.2 million was
outstanding and $56.6 million was available. The facility matures in
2017.
The Eur120 million revolver at Kronos International is secured by the
accounts receivable and inventory of the borrowers (operating
subsidiaries). The facility currently expires in September 2017 and has
a net secured debt-to-EBITDA maximum of 0.7x and net debt-to-equity
minimum of 0.50 to 1 which is calculated at the operating subsidiary
level. At Sept. 30, 2013, the facility was undrawn. The facility tends
to be drawn seasonally with borrowings repaid in the third quarter.
In 2013 the company borrowed $190 million on an unsecured basis from its
ultimate parent, Contran Corporation. The loan amortizes at $5 million
per quarter with the balance due in June 2018. At Sept. 30, 2013, $175
million was outstanding.
Rating Sensitivities:
Negative: Future developments that may, individually or collectively,
lead to negative rating action include:
--Expectation of sustained leverage above 3x;
--Negative free cash flow after dividends.
Positive: Not anticipated over the next 12 months but future
developments that may lead to a positive rating action include:
--Diversification of earnings from TiO2.
Fitch affirmed the ratings of Kronos Worldwide, Inc. as follows:
--Issuer Default Rating (IDR) at 'BB-';
--ABL Revolver at 'BB+'.
Fitch affirmed the ratings of Kronos International, Inc. as follows:
--IDR at 'BB-';
--Senior secured revolving credit facility at 'BB+'.
The Rating Outlook is revised to Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 8, 2013
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=819090
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