Tronox debt rating cut on price hike woes

04 June 2008 19:40  [Source: ICIS news]

(adds Tronox comment in paragraphs 7-8)

HOUSTON (ICIS news)--Moody’s Investors Service on Wednesday downgraded titanium dioxide (Ti02) producer Tronox’s corporate family rating (CFR) due to the difficulty of raising prices amid weak US demand.

Weak economic conditions in North American housing markets will limit the success of price increases for coatings and polyvinyl chloride (PVC) products in 2008 to the point that operating margins will remain below breakeven, Moody's said.

Moody’s bumped down the CFR to B3 from B2 and also downgraded the producer's secured revolver and term debt facilities. The company’s rating outlook was negative, Moody’s said.

The downgrade followed an announcement by Tronox of new price initiatives for Ti02.

“The one notch downgrade for the CFR (following a two notch downgrade in March) is due to the company's inability to affect meaningful price increases to offset rapidly increasing input costs,” Moody’s said.

The rating agency said that weak demand in key end markets has caused operating margins to drop from 6% in 2006 to just below breakeven in 2007 and that they were still negative in the first quarter of 2008.

Director of investor relations Debbie Schramm of Tronox said: "We are making progress and taking the right steps to position Tronox for the uncertain near-term economic environment, and more importantly for long-term success as the TiO2 industry returns to profitability."

Tronox is actively working to implement the price proposals, and views them as necessary to ensure the Ti02 industry can profitably reinvest in the business to meet customers' needs, Schramm said.

“This margin contraction is reflective of poor conditions in the housing industry, which is an important end market for the coatings and PVC that use Tronox's TiO2,” Moody’s said in its advisory bulletin.

In 2007 Tronox sought to pass through higher prices that began to see results late in the year. The company attempted other price initiatives in 2008.

“However, it appears that higher costs, (including energy, raw materials, and freight) and competitive conditions have continued to be difficult, especially in Europe. The price increases, if only partially adopted, are not likely to offset margin deterioration due to cost increases,” Moody’s said.

The Ti02 industry's pricing power has been weakened by a downturn in the North American housing industry, which Moody's feels may continue into late 2009, according to the bulletin.

Besides the weak housing market, Moody’s cited legacy environmental liabilities in its rating decision.

“Moody's believes that these legacy environmental liabilities are unique in size and complexity, and constitute a key negative factor when determining the rating,” the agency said.

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By: John Waggoner
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