INSIGHT: Sector bankruptcies mean times have changed

12 January 2009 17:00  [Source: ICIS news]

By Nigel Davis

Tronox TiO2LONDON (ICIS news)--Tronox has been forced into Chapter 11 bankruptcy protection by a toxic mix of poor market conditions, environmental liabilities and debt.

The world’s third largest titanium dioxide producer has been struggling to push prices higher and generate more cash to help it comply with financial covenants. But the outlook has been grim for a long time.

At a different time, and in a different world, Tronox may have been pulled through but the credit crunch has put it under intolerable pressure. This has been a long time coming but in August, Tronox said it might have to seek Chapter 11 relief to restructure and reorganise. The company’s shares were de-listed from the New York Stock Exchange in September.

Tronox’s environmental liabilities, inherited when the company was spun-off from Kerr McGee in 2006, and related to a plant that operated 50 years ago, are all but overwhelming. But it has also been hard pressed even to generate sufficient sales to cover costs in the midst of the market downturn.

Third-quarter net sales were $418.3m but the cost of sales and selling, general and administrative expenses (SGA) were $429.5m.

Tronox reported a third quarter net loss of $37.9m (€28m), nearly double the $19.1m net loss reported for the year earlier period.

"As we continue to generate losses and negative cash flows, this raises substantial doubts about our ability to continue as a going concern," it said.

The company’s competitors have been seeking to take advantage of the situation and may still well do. The game has been to push to gain market share from the troubled company. Tronox’s production assets have also drawn attention.

The company and its advisers now have to try to ring fence the environmental liabilities and create a going concern. This could be a difficult and painful process involving production shutdowns. Although Chapter 11 affords the patient 18 months to recover, in this case, time is of the essence.

Important end-use markets for TiO2 such as housing construction and automobiles are in the pits. Product prices have been depressed and look set to decline further.

Prices in North America are flat in the first weeks of 2009, according to ICIS pricing. There is little to underpin a push for increases given weak volume demand.

In Europe, January is expected to b a slow month while TiO2 production plan shutdowns are likely in Asia to coincide with the upcoming Chinese New Year holidays.

The Tronox business is continuing without interruption, CEO Dennis Wanless said on Monday, and the company emphasised that operations outside the US, those based Australia, Germany and the Netherlands, were not included in the filing.

Credit Suisse and other lenders have committed $15m of debtor-in-possession (DIP) financing which Tronox says is ample to allow business as usual during the restructuring period.

The company has also asked for approval to pay employees as before the filing and expects the request to be granted as part of the court’s ‘first day’ orders.

“Business as usual” however does not mean that nothing has changed.

The bankruptcy filing is further bad news for Tronox and for a chemicals sector struggling to operate effectively through a period of low demand and severely constrained credit.

In just over a week chemicals has reached a turning point and the flood gates have opened. Indeed, the talk is no longer of just how exposed some of the world’s most highly indebted chemical companies are, but of how they might be restructured in order to survive.

The most heavily burdened will find the next few weeks and months extremely difficult. They will also be extremely concerned about the collapse of end-use markets and consumer demand in the US and other major economies that ultimately affects them all.

The credit crunch delivers a second blow to all companies in such tough times.

In the midst of this recession the industry’s primary lenders are beginning to view the sector differently and ask some questions that are currently very difficult to answer. Attitudes have changed: the way ahead looks tough.

($1 = €0.74)

To discuss issues facing the chemical industry go to ICIS connect
For lean more about titanium dioxide see ICIS chemical intelligence


By: Nigel Davis
+44 20 8652 3214



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