OREANDA-NEWS. Fitch Ratings has downgraded the Issuer Default Ratings (IDRs) of Kronos Worldwide, Inc. (NYSE: KRO) and its wholly owned subsidiary, Kronos International, Inc. to 'B+' from 'BB-'. The Rating Outlook is Stable.

The downgrade reflects a longer than expected downturn in the TiO2 market that has resulted in the company generating consistently negative free cash flow (FCF), which Fitch expects will likely continue over the medium term. Additionally, Kronos' liquidity position is likely to remain weaker than previously expected owing to weak TiO2 fundamentals that have limited the company's available borrowings under its two revolving credit facilities, particularly its European revolver, which has restrictive financial covenants.

While Fitch believes the recently announced price increases by major producers signals a bottom in the market, there is still uncertainty regarding the future dynamics of the TiO2 industry given the potential for pricing pressure from customers and producer's tendency to feed into the boom and bust cycles of the past. The possibility of continued volatility in the TiO2 market will likely cap Kronos' IDR at its current level for the foreseeable future.

A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

Volatile Industry Conditions: As a pure-play TiO2 producer, Kronos is highly sensitive to the volatility of the TiO2 market. This volatility has led to large swings in the company's Fitch-calculated EBITDA over the past four years, which, combined with annual dividend payments around $70 million, has resulted in consistently negative FCF that has weakened the company's liquidity and pressured its credit metrics.

Fitch does expect Kronos' credit profile to strengthen in 2016 on the back of announced price increases that seem to have generally taken root and growing demand from increased construction activity. Supply rationalization should also help balance the TiO2 market with top producers such as Chemours, Huntsman and Tronox all announcing capacity closures/idlings in the past 12-18 months.

However, in Fitch's view uncertainty remains for future producer economics and the overall dynamics of the TiO2 industry. Pricing could be relatively more disciplined going forward now that top producers such as Chemours operate as standalone entities. However, the industry will likely still be highly sensitive to stocking and de-stocking trends as customers substitute lower quality pigments when prices rise beyond their ability to pass through. TiO2 producers have tended to produce at capacity while prices are rising and then curtail production and drop prices to move inventory when pricing overshoots.

Additionally, the planned capacity expansion of Chemour's Altamira facility, which will bring 200k tonnes of annual capacity online by mid-2016, as well as uncertainty regarding future capacity in China, could lead to continued supply pressure in the TiO2 market. Fitch does note, however, that Chemours intends to offset the increase in production from the Altamira expansion with idlings at certain other of its facilities.

Exposure to Raw Material Prices: Kronos is exposed to third-party suppliers for at least 75% of its feedstock requirements. While Fitch believes these markets are well supplied and cost pressure has abated, production is fairly concentrated and margins would become pressured should markets tighten. The company supplies all of its European sulfate needs internally through its ilmenite mines in Norway. However, it purchases chloride process grade slag and natural rutile ore as well as ilmenite for its Canadian sulfate plant under long-term supply contracts.

Concentrated Market: The global TiO2 market is relatively concentrated among a handful of top producers. Fitch estimates the Top 6 accounted for around 55-60% of global capacity in 2015. While Kronos believes it has leading market positions in both Europe and North America, the company has limited ability to impact market dynamics, generally leaving market-moving actions to bigger names such as Chemours and Huntsman. Despite management's belief that it is the largest TiO2 producer in Europe, the company's EBITDA generation has been limited the past two years, which has restricted borrowings 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 normalized EBITDA generation and projects leverage will likely fall below 3.0x in 2016 and likely continue to decline through 2019. Additionally, the company's upcoming maturity payments are light, limited to the amortization of its term loan.

The term loan is collateralized by, among other things, a first priority lien on 100% of the common stock of certain of Kronos Worldwide's U.S. wholly-owned subsidiaries, 65% of the common stock of its Canadian subsidiary and certain first-tier European subsidiaries, and a $395.7 million unsecured promissory note issued by Kronos Worldwide's wholly-owned subsidiary, Kronos International, Inc. to Kronos Worldwide. The facility is also collateralized by a second priority lien on all of the U.S. assets which collateralize the company's North American revolving credit facility. The term loan has no ongoing financial maintenance covenants.

RECOVERY ANALYSIS

For issuers with IDRs at 'B+' and below Fitch performs a recovery analysis for each class of obligations of the issuer. 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.

Using these calculations, Fitch has affirmed Kronos Worldwide Inc.'s ABL facility and Kronos International Inc.'s revolving facility at 'BB+/RR1'. Fitch calculates that both facilities would have outstanding recovery prospects (91%-100%) in a distressed scenario given their first priority lien on working capital.

Fitch has affirmed Kronos Worldwide Inc.'s term loan at 'BB-' but has revised the recovery rating to 'RR3' from 'RR4'. Fitch believes the instrument will have good recovery prospects (51%-70%) in a distressed scenario. The revised Recovery Rating reflects Fitch's assumption that drawings under Kronos' first-lien European facility would likely be limited in a distressed scenario due to covenant restrictions, increasing the projected recovery proceeds the term loan would receive.

KEY ASSUMPTIONS

--Realization of announced price increase spread over Q2 and Q3 of 2016 leading to slightly negative TiO2 price realizations year over year for 2016/2015;
--Continued positive momentum in TiO2 prices through 2019 leading to EBITDA margins trending up from the mid to high single digits in 2016 to the mid-teens by 2019;
--Utilization rates at management guidance leading to an increase in year over year sales volumes in 2016 and relatively flat thereafter;
--CapEx and dividend payments consistent with historical results.

RATING SENSITIVITIES

Positive - No upgrades are currently contemplated given the historical volatility of the TiO2 market and Kronos' lack of diversification as a pure-play producer of the pigment.

Negative - Future developments that may, individually or collectively, lead to negative rating actions include:

--Continued volatility in the TiO2 market leading to expectations of sustained negative FCF generation and volatile EBITDA margins;
--Material debt-funded dividend payments or acquisition activity.

LIQUIDITY

Continued pricing pressure in the TiO2 market reduced Kronos' liquidity in the past year, with cash dropping from nearly $170 million in 2014 to just under $60 million in as of March 31, 2016. The weak pricing environment has also reduced the borrowing base for the company's $125 million North American ABL revolver and limited drawings under the EUR120 million European facility due to covenant restrictions. At March 31, 2016 Kronos reported that it had around $79.1 million available under the North American facility and would only be able to draw up to approximately EUR6.7 million ($7.5 million) under the European revolver before tripping the facility's financial covenants.

While Fitch expects the available amount under the North American facility to increase as TiO2 prices recover, Fitch believes available drawings under the European revolver will remain restricted and estimates the company has not drawn on the facility in either of the last two years.

The North American revolver at Kronos Worldwide is secured by receivables and inventory in North America. The facility has a 1.1:1.0 minimum fixed charge covenant at such times as availability is less than 10% but no other maintenance financial covenants. The European revolver is secured by the accounts receivable and inventory of the borrowers (European operating subsidiaries of Kronos International). The facility expires in September 2017 and has a net secured debt to EBITDA maximum covenant of 0.7x and net debt to equity minimum covenant of 0.50 to 1 which is calculated at the operating subsidiary level.

Outside of its two revolving credit facilities, which both mature in 2017, Kronos' only other notable maturity is its term loan due 2020.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions:

Kronos Worldwide, Inc.
--IDR downgraded to 'B+' from 'BB-';
--ABL Revolver affirmed at 'BB+/RR1';
--Senior secured term loan affirmed at 'BB-', Recovery Rating revised to 'RR3' from 'RR4'.

Kronos International, Inc.
--IDR downgraded to 'B+' from 'BB-';
--Senior secured revolving credit facility affirmed at 'BB+/RR1'.

The Rating Outlook is Stable.