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Tronox Incorporated -- Moody's assigns B3 rating to Tronox's new senior unsecured notes

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Rating Action: Moody's assigns B3 rating to Tronox's new senior unsecured notesGlobal Credit Research - 01 Mar 2021New York, March 01, 2021 -- Moody's Investors Service, ("Moody's") assigned a B3 rating to the new $625 million 8 year senior unsecured notes issued by Tronox Incorporated and guaranteed by Tronox Holdings Plc. The proceeds of the notes will be used to repay the outstanding amount of the 6.50% senior unsecured notes due 2026, the call premium of the existing notes and associated fees and expenses. The rating is subject to the transaction closing as proposed and receipt and review of the final documentation. The outlook on the ratings is stable."This notes refinancing, together with the recently announced term loan refinancing, will extend the company's maturity profile and lower its average interest rate," according to Joseph Princiotta, SVP at Moody's and the lead analyst covering Tronox. "The term loan and notes refinancing are expected to be roughly neutral to the net debt amount and net debt leverage," Princiotta added.Assignments:..Issuer: Tronox Incorporated....Gtd Senior Unsecured Regular Bond/Debenture, Assigned B3 (LGD5)RATINGS RATIONALETronox Holdings Plc's credit profile and current ratings (B1 CFR) reflect the benefits from the company's market position as one of the world's largest titanium dioxide producers, industry leading vertical integration and co-product production, actual and prospective benefits from Cristal acquisition synergies, and good liquidity. The credit profile also reflects heavy exposure to the cyclical titanium dioxide industry, which Moody's believes is in the early stages of a volume and pricing upcycle. The credit profile and ratings also anticipate significant weakening in credit metrics outside the normal boundaries for the rating category during cyclical trough periods and concerns about free cash flow in the trough.Moody's has a favorable outlook for TiO2 markets over the next two years and expects strong demand growth against the backdrop of modest global supply additions to underpin favorable fundamentals, at least through 2021, allowing price increases through the year and in all major regions. However, the pace and timing of the recovery is unclear and might be choppy due to pandemic-related restrictions and certain supply chain disruptions.Prices are already up in recent months across all regions, especially in Asia, which experienced weak spot prices through most of 2020. Margins should also benefit from better overhead absorption in 2021, which was a headwind last year due to weaker production volumes. Coatings demand across all major regions and end markets is likely to be favorable for the year, while most markets for plastics and other end markets should also be firm or robust.As proposed, the new notes are expected to provide a substantially similar covenant package compared to the existing notes, with limitation on total net secured leverage ratio not to exceed 4.5x or cash interest coverage ratio not to be less than 2x.The SGL-2 rating reflects good liquidity including $619 million cash balances and $422 million available under the revolving credit agreements as of December 31, 2020. In March 2019, the company, through its South African subsidiaries -- Tronox KZN Sands Proprietary Limited and Tronox Mineral Sands Proprietary Limited -- established R1 billion (approximately $68 million at December 31, 2020 exchange rate) revolver due March 2022 and R2.6 billion term loan (approximately $177 million at December 31, 2020 exchange rate) facility due March 2024. The new cash flow revolver will contain a springing maximum first lien leverage ratio of 4.75:1.00 which will trigger if utilization exceeds 35% (less undrawn LCs and cash collateralized LCs). The new term loan will not have a financial covenant. The South African revolver contains net leverage and coverage tests, which would not trigger events of default and allow for cure periods. We expect Tronox to generate free cash flow in 2021.The stable outlook assumes TiO2 prices and volumes continue to recover allowing at least modest improvement in EBITDA and metric trends and positive free cash flow for the year. The stable outlook also assumes that the Cristal transaction continues to generate target synergies and good liquidity is maintained through the medium term.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGAn upgrade would require the company to maintain its commitment to deleveraging and reducing balance sheet debt to $2.5 billion or less ahead of the next trough and on a sustainable basis. An upgrade would also require the favorable trends and realization in acquisition synergies continue, and confidence that the company will maintain at least $300 million of available liquidity.Moody's would consider a downgrade if expectations or actual results show substantive fundamental weakening resulting in negative free cash flow anytime over the next two years. Moody's would also consider a downgrade if the cycle in TiO2 turns down before the company is able to meaningfully reduce debt, or if the company fails to realize a meaningful portion of anticipated operating synergies, or if adjusted financial leverage remains above 5.0x, or if available liquidity falls below $250 million.ESG CONSIDERATIONSESG risks and exposures are not a factor in today's rating action and are not a significant factor in the company's ratings at this time. Environmental exposure and costs for commodity companies can be meaningful, and even more so for TiO2 players. Approximately 87% of Tronox's TiO2 production use the chloride process, which is a continuous process, has lower energy requirements, produces less waste and is less environmentally harmful than the sulfate-based process. Tronox assumed additional environmental exposure and costs as part of the Cristal acquisition and has booked a $56 million provision for environmental costs related to the remediation of residual waste mud and sulfuric waste deposited in a former TiO2 manufacturing site operated by Cristal from 1954 to 2011. The provision is significant but related expenditures are likely to spread over many years.Social risks are moderate but potentially increasing as the ongoing hearings between the EU Commission and the industry may result in tighter regulation for TiO2, the scope of which is not yet clear as there is still debate over the carcinogenicity of TiO2. As a public company, governance issues are viewed as modest and supported by what has thus far been communication of reasonable financial policies for the ratings category.Tronox Holdings Plc (Tronox), re-domiciled in United Kingdom in March, 2019. Including the acquisition of Cristal, Tronox is the world's second largest producer of titanium dioxide (TiO2) and is the most backward integrated among the leading western pigment producers into the production of titanium ore feedstocks. It also co-produces zircon, pig iron and other products. The company operates nine pigment plants and eight mineral sands facilities globally. On February 23, 2021, Tronox announced that Exxaro Resources Limited ("Exxaro") offered for sale 17 million shares (about 10% of the outstanding shares of Tronox as of December 31, 2020) in a secondary offering. The company also announced that Tronox will issue to Exxaro about 7 million shares in exchange for Exxaro's current 26% shareholding in the company's South African operating subsidiaries which hold Tronox's mining licenses. Tronox's revenues were $2.8 billion for the twelve months ended December 31, 2020.The principal methodology used in this rating was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Tronox Holdings Plc (Tronox), re-domiciled in United Kingdom in March, 2019. Including the acquisition of Cristal, Tronox is the world's second largest producer of titanium dioxide (TiO2) and is the most backward integrated among the leading western pigment producers into the production of titanium ore feedstocks. It also co-produces zircon, pig iron and other products. The company operates nine pigment plants and eight mineral sands facilities globally. On February 23, 2021, Tronox announced that Exxaro Resources Limited ("Exxaro") offered for sale 17 million shares (about 10% of the outstanding shares of Tronox as of December 31, 2020) in a secondary offering. The company also announced that Tronox will issue to Exxaro about 7 million shares in exchange for Exxaro's current 26% shareholding in the company's South African operating subsidiaries which hold Tronox's mining licenses. Tronox's revenues were $2.8 billion for the twelve months ended December 31, 2020.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Joseph Princiotta Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Glenn B. Eckert Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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