2012年5月11日 / 晚上7点48分 / 5 年前

TEXT-S&P raises Valhi rating to 'BB-'

Overview	
     -- U.S.-based titanium dioxide (TiO2) producer Kronos Worldwide Inc., a 	
subsidiary of U.S. holding company Valhi Inc., is obtaining a $125 million 	
asset-based revolving credit facility and issuing $600 million in term loans. 	
The company plans to use a portion of the proceeds to refinance senior secured 	
notes at its Germany-based subsidiary Kronos International Inc.	
     -- We are raising our corporate credit ratings on Valhi and Kronos 	
International Inc. to 'BB-' from 'B+'. At the same time, we are assigning our 	
'BB-' corporate credit rating to Kronos Worldwide Inc.	
     -- We are assigning our 'BB-' issue-level rating and '4' recovery rating 	
to Kronos Worldwide's term loan facility.	
     -- The stable outlook reflects our expectations that industry conditions, 	
operating results, and cash flow will continue to support credit quality and 	
that the company will not meaningfully increase debt leverage to fund growth 	
or shareholder rewards.	
	
Rating Action	
On May 11, 2012, Standard & Poor's Ratings Services raised its corporate 	
credit ratings on Dallas-based Valhi Inc. and its subsidiary, Kronos 	
International Inc., to 'BB-' from 'B+'. At the same time, we assigned our 	
'BB-' corporate credit rating to Kronos Worldwide Inc. The outlook on all 	
these ratings is stable.	
	
We also assigned our 'BB-' issue-level rating (same as the corporate credit 	
rating) to Kronos Worldwide's $600 million term loan facility due 2019. We 	
assigned this facility a recovery rating of '4', indicating our expectation of 	
average recovery (30% to 70%) in the event of a payment default. Upon 	
completion of the financing, the ratings on Kronos' existing senior secured 	
notes will be withdrawn.	
	
Rationale	
The upgrade reflects our expectation that sustained strength in the TiO2 	
market over the next 12 to 24 months will support current operating results 	
and credit metrics, despite an increase in debt as a result of this 	
refinancing transaction. Although we remain cautious in our view on European 	
demand trends in 2012, we believe that tight conditions in the TiO2 market 	
will enable Kronos to increase selling prices to largely offset raw material 	
feedstock price increases. We also believe that management will be prudent in 	
its deployment of free cash flows and will not increase debt leverage to fund 	
growth or shareholder rewards.	
	
The ratings reflect the company's limited focus on the cyclical, 	
commodity-based titanium dioxide (TiO2) market and very aggressive financial 	
policies. We also view the company's concentrated ownership and complex 	
corporate structure as limiting factors. However, the ratings also reflect our 	
expectation that favorable industry conditions will support Valhi's current 	
financial profile, as well as our belief that the company's growth and 	
shareholder rewards plans will not increase its debt leverage beyond our 	
expectations at the current ratings. We characterize the company's business 	
risk profile as "weak" and its financial risk profile as "significant."	
	
Based on our scenario forecasts, we expect Valhi's credit metrics to remain 	
strong for the current rating, with funds from operations (FFO) to adjusted 	
debt greater than 45% over the next two years, compared with the 25% to 30% 	
expected at the current ratings. We expect that global demand will support 	
double-digit percentage annual TiO2 selling price increases over this period. 	
Although, we expect raw material feedstock price increases in a similar range 	
over this period, we expect TiO2 producers will be able to maintain EBITDA 	
margins near current levels by passing through these costs. Our forecast also 	
incorporates our expectation that the company will return a moderate amount of 	
cash to shareholders while business conditions remain favorable.	
	
The financial metrics of Kronos' parent, Valhi, have improved significantly in 	
the past two years, with operating results benefiting from favorable industry 	
conditions. As of March 30, 2012, its total adjusted debt to EBITDA was about 	
1.2x, and the ratio of funds from operations (FFO) to total adjusted debt was 	
about 70%. As of March 30, 2012, Valhi had about $780 million in total debt 	
(adjusted for operating leases, environmental liabilities, and postretirement 	
benefit obligations, and excluding loans from Snake River Sugar Co.), which we 	
expect to increase to about $900 million with the refinancing.	
	
Pro forma for the refinancing, we expect Valhi's financial profile to weaken 	
only slightly, despite this increase in debt. At the current ratings, we do 	
not expect Valhi's growth strategies or acquisitions to result in sustained 	
additional debt or the deterioration of the company's credit metrics. Valhi 	
recognizes environmental liabilities of $55 million as of March 30, 2012. 	
However, this figure does not include several sites for which the company 	
cannot currently estimate costs.	
	
Valhi is a holding company with about $2 billion in sales. It derives the bulk 	
of its revenues (more than 90% in 2011) and operating profits from its 	
majority ownership of Kronos Worldwide Inc., the world's third-largest 	
producer of TiO2. Although Kronos derives over 50% of its sales from Europe, 	
exposure to weaker economies is limited, with over 80% of European sales 	
coming from Northern Europe and Germany.	
	
The company's operating performance has improved primarily as result of 	
sequential increases in pricing within its TiO2 business. We expect Valhi to 	
continue benefiting from tight supply and favorable pricing. For the next year 	
or two, we expect revenue growth to come primarily from stronger pricing, 	
because the company has limited flexibility to increase production volume 	
without meaningful capital spending. We also think continued price increases 	
will enable the company to maintain product profit margins, despite sharply 	
rising raw material ore costs pressuring its margins over the coming year.	
	
We expect Valhi's longer-term growth to reflect the overall economy and key 	
end markets related to the housing and automotive sectors, as well as 	
population growth and rising standards of living in emerging markets. Because 	
of these factors, we expect Valhi to maintain profitability and to generate 	
strong free cash flow over the next few years.	
	
The TiO2 industry is fairly concentrated, with five producers accounting for 	
more than 60% of global capacity. The industry experiences cyclical downturns 	
when falling demand leads to supply imbalances, and when raw material prices 	
fluctuate. As a result, producers' financial results can swing significantly 	
depending on economic conditions, the timing of new capacity additions, and 	
the impact of rising raw material costs. Recently, operating results have been 	
favorable, largely because of high industry capacity usage and improving 	
demand, which have supported higher pricing. We expect these trends to 	
continue for the next few years. However, over the longer term, new capacity 	
additions (including one recently announced by industry leader E.I. DuPont de 	
Nemours & Co.), could lead to a less favorable supply-demand relationship. 	
	
Liquidity	
We consider Valhi's liquidity to be "adequate" and believe its cash sources 	
will more than cover its cash needs over the next two years--even in the event 	
of moderate, unforeseen EBITDA declines. Pro forma for the refinancing, we 	
expect the company to have about $50 million in cash and equivalents and about 	
$350 million available under committed credit facilities (on a consolidated 	
basis). We expect the company to continue producing strong free cash flow over 	
the next two years.	
	
Relevant aspects of our assessment of the company's liquidity profile are as 	
follows:	
	
     -- We expect sources of liquidity to exceed uses by 1.2x or more over the 	
next two years.	
     -- We believe net sources would be positive, even with a 15% EBITDA 	
decline.	
     -- We believe the company has the ability to absorb low-probability 	
shocks, based on its cash flow and available liquidity.	
	
As a result of the refinancing, we believe debt maturities are manageable. The 	
new term loan matures in 2019 and we expect the company will refinance Kronos 	
International's revolving credit facility due 2013 well in advance of its 	
maturity. The company also had approximately $109 million in underfunded 	
obligations for its U.S. and foreign pension and pension-related obligations 	
and $55 million in environmental and litigation-related liabilities as of 	
March 30, 2012, which should be manageable.	
	
Recovery analysis	
The company's $600 million term loan facility due 2019 is rated 'BB-' (the 	
same as the corporate credit rating) with a recovery rating of '4', indicating 	
our expectation of average recovery (30% to 70%) in the event of a payment 	
default. For the complete recovery analysis, see our upcoming recovery report 	
on Kronos Worldwide, to be published on RatingsDirect.	
	
Outlook	
The stable outlook reflects our expectation that Valhi will maintain its 	
improved financial profile and adequate liquidity. We expect favorable 	
industry conditions to support operating results and financial metrics over 	
the next two years. We also expect that management will maintain a prudent 	
approach to funding growth and shareholder rewards.	
	
Based on our scenario forecasts, we expect Valhi to maintain financial metrics 	
that are strong for the current ratings. However, the highly cyclical, 	
commodity-based nature of the TiO2 industry and the company's very aggressive 	
financial policies limit the potential for higher ratings over the next year. 	
	
We could lower the ratings if unexpected business obstacles--such as a drastic 	
reduction in end-market demand or significantly higher-than-expected titanium 	
ore price increases--reduce the company's EBITDA margin to less than 10%. At 	
this point, we expect FFO to total adjusted debt to decrease to less than 20%. 	
We could also lower the ratings if the company uses additional debt to fund 	
growth plans or shareholder rewards without an offsetting improvement to its 	
business risk profile, or if environmental liabilities increase meaningfully 	
as a result of additional accounting disclosure on remediation obligations.	
	
Related Criteria And Research	
     -- Methodology and Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011 	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009 	
     -- Key Credit Factors: Business And Financial Risks In The Commodity And 	
Specialty Chemical Industry, Nov. 20, 2008 	
	
Ratings List	
New Rating; Outlook Stable	
	
Kronos Worldwide Inc.	
 Corporate Credit Rating                    BB-/Stable/--      	
  US$600 mil term loan B bank ln due 2019   BB-                	
   Recovery Rating                          4                  	
	
Upgraded	
                                            To                 From	
Valhi Inc.	
Kronos International Inc.	
 Corporate Credit Rating                    BB-/Stable/--      B+/Stable/--

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