Tronox Ltd. Outlook Revised To Negative From Stable On Difficult Market Conditions; Ratings Affirmed

  • We anticipate that a global economic slowdown in 2020 will hurt demand for titanium dioxide (TiO2) in key end markets like architectural coatings, and this will lead to weakened credit measures at Tronox Ltd.
  • We expect EBITDA margins in 2020 to be similar to 2019, benefitting from synergy capture that will help to alleviate the effects of a decline in sales.
  • We have affirmed our 'B' issuer credit rating on the company and revised the outlook to negative. We are affirming the issue-level ratings on the secured debt at 'BB-' and the recovery ratings at '1'. We also affirmed the issue-level ratings on the unsecured debt at 'B' and the recovery ratings at '4'.
  • The negative outlook reflects risks that macroeconomic conditions could weaken more than we anticipate, leading to a weakening of earnings and credit measures that are greater than what we have incorporated in our ratings analysis.
NEW YORK (S&P Global Ratings) March 27, 2020--S&P Global Ratings today took the rating actions listed above.
The outlook revision to negative from stable reflects our revised macroeconomic assumptions and the impact we expect the current economic climate could have on key end markets for TiO2 like architectural coatings. S&P Global Ratings now projects a global recession in the first half of 2020, before a rebound in the second half. In these circumstances, we expect TiO2 demand to decline, especially in cyclical end markets such as architectural coatings. We believe the coronavirus pandemic will reduce near-term demand because of government-mandated restrictions that lead people to defer activities such as home renovations and car purchases. We recognize that Tronox has opportunities for substantial synergy capture and operational improvements following its acquisition of Cristal in 2019. We expect that synergy capture will help the company to sustain credit measures that are appropriate for the 'B' rating, with debt to EBITDA of between 5x and 6x in 2020.
The negative outlook on Tronox reflects the potential for a weakening of earnings and credit measures that is greater than what we have incorporated in our ratings analysis. Our base case assumes that despite a global macroeconomic recession in the first half of 2020 leading to lower demand for coatings and TiO2, that synergy capture will offset the majority of those headwinds in terms of its impact on profitability. We expect EBITDA margins in 2020 to be similar to those in 2019. For the rating, we expect debt to EBITDA in the range of 5x to 6x on a weighted average sustained basis. Our rating continues to reflect the expectation for high volatility in the company's credit measures.
We could lower our rating on Tronox over the next 12 months if we expected weighted average debt to EBITDA to consistently exceed 6.0x on a sustained basis. This could occur if we believed that sales and earnings would weaken more than we anticipate due to the disruptive effect of the coronavirus pandemic. TiO2 pricing and demand have been steady in the first quarter of 2020, but we expect demand weakness to materialize beginning in the second quarter due to global macroeconomic recession in the first half of the year. If such weakening is sharper or longer lasting than our base case, we could lower the rating. We believe debt to EBITDA could weaken to such levels if EBITDA margins compressed by 500 basis points (bps) or more due to lower demand. This could also occur if operational improvement initiatives related to the Cristal acquisition proved to be a smaller-than-expected benefit, or if unexpected cash outlays or weaker-than-expected cash flows led liquidity sources to drop below 1.2x liquidity uses.
We could revise our outlook to stable if the company's 2020 earnings prove more resilient than expected throughout the period when business and consumer activity remains depressed due to coronavirus related restrictions, or if we believed that end markets could bounce back, after declining as we expect, in a short period. In such a scenario, we would expect debt to EBITDA consistently at the stronger end of the 5x to 6x range even after factoring in potential downturns in pricing and demand. We believe an improvement in EBITDA margins by about 250 bps above our expectations could result in credit measures at those levels and generate sufficient earnings to account for potential volatility. Additionally, such a scenario could occur if Tronox can improve Cristal's operations faster than anticipated, resulting in increased production and reduced costs.
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