S&P Downgrades Tronox (TROX) to 'B+'; Outlook Negative

Standard & Poor's Ratings Services said it lowered its corporate credit rating, on Tronox Ltd. (NYSE: TROX) to 'B+' from 'BB-'. The outlook is negative.

We also lowered our issue-level rating on Tronox's senior secured debt one notch to 'BB' from 'BB+'. The recovery rating on the company's senior secured debt is unchanged at '1', reflecting our expectation of very high recovery (90%-100%) if a default occurs. At the same time, we lowered our issue-level rating on the company's senior unsecured debt to 'B' from 'B+'. The recovery rating on the unsecured debt is unchanged at '5', reflecting our expectation of modest (upper half of the 10%-30% range) recovery if a default occurs.

"The ratings on Tronox reflect our assessment of the company's business risk profile as fair and its financial risk profile as highly leveraged," said Standard & Poor's credit analyst Sebastian Pinto-Thomaz. "We believe the 2015 acquisition of the alkali chemicals business from FMC Corp. modestly improves the company's business profile by increasing diversity and providing additional earnings and cash flow stability, but we continue to assess Tronox's business risk profile as fair," he continued.

Tronox funded the 2015 transaction entirely with cash, increasing leverage, and stretching the company's credit measures beyond the level we would expect for an aggressive financial risk profile. At the time, we anticipated a greater improvement in 2016 credit measures. Although we continue to believe credit measures will improve in 2016, we do not envisage them improving to levels appropriate for an aggressive financial risk profile. We expect credit measures in 2016 will be appropriate for the highly leveraged financial risk profile, including a funds from operations (FFO) to total debt ratio below 12%. We assume that 2016 EBITDA will be higher than 2015 EBITDA (pro forma for 12 months of the alkali operation) in our base case because of improved pricing for titanium dioxide (TiO2), but not as quickly as originally anticipated.

We assume that operating performance in 2016 will benefit modestly from recently announced price increases for the company's key product, TiO2. Although improvements to pricing could occur in 2016, market conditions remain uncertain, and we do not factor further strengthening into pricing. Our previous assumptions were for a stronger recovery in the TiO2 markets in 2016, but we are still observing signs of overcapacity and slow demand growth. Still, recent price increase announcements are early signs of a possible steady revival of the sector from the lows achieved in 2015.

The negative outlook reflects the risk that Tronox's credit measures do not improve as much as anticipated over the next two years. Our assumption is that EBITDA and FFO will improve in 2016 relative to 2015 and continue to improve beyond 2016 as the company benefits from an uptick in the TiO2 sector in pricing terms. We believe Tronox's vertical integration will position it well relative to other competitors in the TiO2 and Alkali segments over the next 12 months. We believe that the TiO2 market will continue to be volatile in the future and that TiO2 will remain a majority contributor to Tronox's EBITDA. We do not assume any acquisitions and our base case expectations for the next 12 months are for the adjusted FFO/debt ratio to be below 12%.

You May Also Be Interested In

• S&P 500 above 8,000 in 2026 now looks ambitious, Citi says
• JPMorgan Downgrades Chewy Inc. (CHWY) to Neutral
• KeyBanc Starts CF Industries (CF) at Underweight