Moody’s Investors Service (“Moody’s”) has downgraded the Corporate Family Rating (“CFR”) of Venator Materials plc (“Venator”) to Caa1 from B2, the Probability of Default Rating (“PDR”) to Caa1-PD from B2-PD and the company’s Speculative Grade Liquidity Rating (“SGL”) to SGL-4 from SGL-2. The ratings of Venator Materials LLC’s senior secured term loan B and senior secured notes downgraded to Caa1 from B1, and the ratings on the senior unsecured notes to Caa3 from Caa1. The outlook changed to negative from stable.
The rating downgrades reflect the rapid deterioration in Venator’s credit metrics and financial flexibility given the negative EBITDA for the last two quarters, continued weak demand for TiO2, high energy costs and operational challenges in Europe. Although destocking is likely to end in early 2023, business fundamentals will remain soft throughout the year. While management is implementing business restructuring, asset disposals and sales and lease back transactions, refinancing risk is high due to poor credit metrics and liquidity remains challenged with expected negative free cash flow in 2023 and debt maturities in 2024. Moody’s also considers the possibility of a distressed exchange, which is deemed a default under Moody’s definition.
Downgrades:
..Issuer: Venator Materials plc
….Corporate Family Rating, Downgraded to Caa1 from B2
….Probability of Default Rating, Downgraded to Caa1-PD from B2-PD
….Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-2
..Issuer: Venator Materials LLC
….Senior Secured Term Loan B, Downgraded to Caa1 (LGD4) from B1 (LGD3)
….Senior Secured Notes, Downgraded to Caa1 (LGD4) from B1 (LGD3)
….Senior Unsecured Notes, Downgraded to Caa3 (LGD5) from Caa1 (LGD5)
Outlook Actions:
..Issuer: Venator Materials plc
….Outlook, Changed To Negative From Stable
..Issuer: Venator Materials LLC
….Outlook, Changed To Negative From Stable
RATINGS RATIONALE
Venator’s credit profile deteriorated rapidly in late 2022. Sales volume fell more than expected with the weakening economy and the company’s production cost ran up with high energy costs in Europe. The market downturn hit Venator particularly hard, as the majority of its production facilities are based in Europe and have a higher cost base than peers. Trailing twelve months EBITDA is poised to fall to near break-even level in early 2023 from $180 million in 2021. Total reported debt remained close to $1 billion at the end of September, 2022. We estimate Venator’s EBITDA generation won’t be enough to cover nearly $140 million annual payments for interest expenses and capital expenditures, and debt/EBITDA will remain above 10x over the next one to two years.
Risk of prolonged earnings weakness is high given the gloomy consumer sentiment, weak industrial activities and high energy costs in Europe. The invasion in Ukraine could extend the TiO2 market downturn beyond the typical length of three to five quarters before sale volumes return to positive growth. Additionally, Venator has to overcome operational challenges, such as production disruption at Scarlino facility, and make payments for business restructuring, Pori shutdowns and other legal settlements in 2023 and beyond. It is yet to be seen how much of the recently announced $50 million cost reduction program can be achieved and whether its goal to cut annual cash uses by $70 million by 2024 compared to 2022 will be met. Earnings and cash flow generation have been behind expectation since its 2017 IPO.
The SGL-4 rating reflects the expected negative free cash flow and debt maturities in the next 12-18 months. The reported liquidity of $275 million (including cash and available ABL revolver) at the end of 2022 should be enough to pay for its interest payments and capital expenditures in 2023. The expected $120 million net proceeds from selling its color pigments business in early 2023 will help cover additional cash outlays for business restructuring, Pori shutdown and various contingent liabilities in 2023. However, we expect free cash flow will remain negative and reduce its available liquidity over the next 12-18 months.
In particular, negative free cash flow and poor credit metrics will risk a timely refinancing of its $354 million secured term loan due in August 2024. Failure to extend the term loan maturity would accelerate its ABL revolver’s maturity to May 2024. The debt maturities will compel the company to look for alternative financing sources and reassess its long-term capital structure. In our view, Venator is likely to take aggressive actions, including debt exchange offers, to alleviate its debt burden and enhance shareholder returns, after two independent board members were nominated and the chairman of the board was replaced amid calls for changes by the second largest shareholder J&T in January 2023.
Venator’s $330 million asset-based revolving credit facility (unrated) matures in October 2026 or 91 days before the maturity of any debt more than $75 million. The borrowing base was reported to be approximately $279 million, of which $233 million was available to be drawn after deducting letters of credit, as of September 30, 2022. The credit agreement contains a springing fixed charge coverage ratio test that does not become effective unless excess availability falls below 10% of the facility. We expect the company to draw down its revolver to cover negative free cash flow in the next 12-18 months, but not to the extent that would trigger a covenant testing.
The Caa1 ratings on the senior secured term loan B and senior secured notes are in line with the CFR, reflecting security supported by first lien positions on domestic and second lien on some foreign assets. Venator has material non-guarantor subsidiaries with trade payables and other obligations that have to be satisfied before any of the assets of such non-guarantors would be available for secured term loan and notes. The Caa3-rated senior unsecured notes, two notches below the CFR, reflects their subordinated ranking in the capital structure.
Venator’s credit profile benefits from its market position among the world’s leading titanium dioxide producers, strong presence in specialty products, and modest earnings diversity from the Performance Additives segment. Prospective benefits from a business improvement program are considered in its credit profile.
ESG Considerations
Today’s action is not directly driven by ESG factors. Venator’s highly negative Credit Impact Score (CIS-4) mainly reflects its high exposure to governance risks (G-4). Governance risks are considered high due to balance sheet leverage and poor track record of meeting earnings expectations. The company has recently added two independent directors to the board. Venator adheres to public company financial reporting and has good communication and financial policies.
The company has a very high exposure to environmental risks (E-5). Waste and pollution risks are considered very high for commodity chemical companies, and that includes TiO2 producers, as environmental exposure and costs can be meaningful and can have economic and credit and implications. Roughly two-thirds of Venator’s TiO2 production use the sulfate process; one-third uses the chloride route. Both have significant water usage, environmental exposure and GHG emissions.
Venator expects to incur additional environmental costs through 2024 related to the remediation and closure of the Pori facility. The company had environmental reserves of $4 million as of Sep 30, 2022, relating to pending environmental cleanup, site reclamation, closure costs, and known penalties. In addition, the company incurred $10 million capital expenditures for Environmental, Health and Safety (EHS) matters in the first nine months of 2022.
Venator has high exposure to social risks (S-4). Social risks for Health & Safety are considered high for commodities in general and TiO2 specifically. Responsible Production risks are also high, reflecting in part the EU commission’s act to change the classification of TiO2 to a Category 2 Carcinogen, which became effective in October 2021.
Rating outlook
The negative outlook reflects our expectations for a slow recovery in the TiO2 industry, continued weak earnings and negative free cash flows in the next 12-18 months, as well as the increasing risk of refinancing its term loan due in August 2024.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A rating upgrade could be considered, if the company improves its EBITDA to at least cover interest expenses and capital expenditures. Achieving breakeven free cash flow and extending term loan maturity would also be positive to its credit profile.
Continued weak earnings and negative free cash flow could result in further rating downgrades. Also, failure to successfully refinance its debt and achieve a more tenable capital structure could also have negative rating implications.
Headquartered in the United Kingdom, Venator Materials plc is the world’s fourth-largest producer of titanium dioxide pigments used in paint, paper, and plastics, and a producer of performance additives for a variety of end markets. Venator was created through an IPO transaction rom Huntsman Corporation in 2017. Venator generated approximately $2.3 billion in revenues for the twelve months ended September 30, 2022.
