INSIGHT: Tronox's pain deepens under debt burden

26 August 2008 16:15 [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS news)--Highly leveraged in this credit market? Good luck! Companies saddled with onerous debt loads in today’s challenging operating environment will find it harder and harder to get the wiggle room they need.

Some will survive and some will not. Right now, US-based Tronox, the world’s third largest producer of ubiquitous white pigment titanium dioxide, is on the ropes.

After reporting dismal second-quarter results on 31 July, which featured a loss of $29.9m (€20.3m) on cost increases, production difficulties and write-offs, credit rating agencies rushed to downgrade the company’s debt.

Standard & Poor’s (S&P) cut its ratings on Tronox by two notches, from B to CCC+ and placed the ratings on CreditWatch with negative implications, citing “increased concerns regarding the company’s ability to comply with, or successfully amend, the financial covenants within its credit facilities”.

Moody’s Investors Service likewise downgraded Tronox two notches, from B3 to Caa2 on 1 August and then on Monday took the ratings down another notch to Caa3.

With $544.9m in debt as of 5 August, Tronox is trying to prevent a big fall in a high-wire juggling act.

The company in July was able to renegotiate the terms of its $250m revolving credit agreement, allowing for higher leverage ratios and thus further financial flexibility.

This came on top of an amendment last February, which loosened leverage terms, but apparently not enough as financial performance continued to deteriorate.

While the move gives Tronox some breathing room, it comes at a steep cost. The company paid fees of $2.5m for each of the amendments in February and July.

More importantly, because of the company’s higher leverage ratios, its interest rate on the revolver rose by 50 basis points, to 400 bp above Libor (London interbank offered rate) as of 1 July.

On top of that, as a result of its rating downgrades on 31 July, its borrowing rate rose by another 50 bp, to 450 bp above Libor.

Under the revised terms of the credit agreement, Tronox still must reduce its total leverage ratio - debt/EBITDA (earnings before interest, tax, depreciation and amortisation) - from 5.55 times in the third quarter of 2008 to 5.35x in the fourth quarter and down to 4.5x in the first quarter of 2009.

The agreement calls for a further decline to 3.5x by the fourth quarter of 2009.

“In a different credit and economic environment, the potential of having to seek flexibility from lenders could be much less of a concern,” said S&P chemical team leader Kyle Loughlin in an interview with ICIS.

“If the company has a reasonable story to tell and it’s a cyclical industry, lenders usually can find a way forward to support the company,” he added.

“But today, lenders are not keen on taking more credit exposure, so we are treading more carefully in terms of watching covenants and determining whether or not companies can get relief from those covenants.”

Tronox's $250m revolver expires in November 2010, its $125m term loan in November 2011 and its $350m in 9.5% senior unsecured notes come due in December 2012.

The producer is scrambling to raise prices, cut costs and sell off large swathes of land holdings to meet its obligations. The company on 15 August also replaced CEO Thomas Adams with new interim chairman and CEO Dennis Wanlass.

Tronox holds an unspecified interest in Landwell Co, which owns 2,200 contiguous acres of land in Henderson, Nevada, near one of Tronox’s facilities. Tronox received proceeds of around $18m in the first half from land sales and is in negotiations to sell more.

The company’s goal was to achieve $100m in cumulative proceeds from sales of land it owns outright by 2010, said Debbie Schramm, director of investor relations and communications for Tronox.

It’s hardly the best time to be selling real estate in this market, and in Nevada no less, but desperate times call for desperate measures.

Said S&P analyst Paul Kurias: “That amount [sold so far] is not really meaningful given the size of Tronox's debt and the extent of decline in operating performance in 2008.

“Tronox has not reported an estimate for future land sales and given the situation in real estate markets, the amount and timing of potential cash inflows from future land sales are too uncertain to be a factor in our analysis.”

Tronox is not alone in its travails. Despite the relatively strong balance sheets in the chemical industry, there are still a number of companies struggling under the weight of debt.

Added S&P's Loughlin: “Liquidity is becoming a big concern for us, especially as it relates to companies being in compliance with financial covenants, which are getting tighter for a lot of these leveraged companies.

“As results falter, the prospect of companies breaching these covenants becomes more real.”

In the meantime, Tronox’s bonds are trading at around 50 cents on the dollar, reflecting the pessimism bondholders have on being made whole.

Tronox itself mentioned the possibility of bankruptcy in its 10-Q quarterly report filing with the US Securities and Exchange Commission (SEC) on 11 August.

“If we continue to experience negative impacts on our operations, the company may need to seek relief under chapter 11 of the US bankruptcy code to allow the company to, among other things, restructure its capital structure and reorganise its business, including its environmental legacy issues,” said Tronox.

Tronox stock has collapsed to around 50 cents, representing a market capitalisation of just $21m, and is in danger of being delisted from the New York Stock Exchange.

US-based oil company Kerr-McGee took Tronox public on 22 November 2005, at $13.50.

($1 = €0.68)

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By: Joseph Chang
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