For this week’s bond review, Durig looks at a chemical company created by a DuPont spinoff in 2015. Chemours Company (NYSE:CC) is a global leader in the manufacturing of fluoroproducts, chemical solutions, and titanium technologies. It is one of the leading global producers of titanium dioxide (used in paints, coatings, plastics, cosmetics and food), as well as the creator and producer of Opteon™, an award winning environmentally sustainable refrigerant. Highlights from the company’s second quarter results include:
- Net sales of $1.2 billion.
- Adjusted EBITDA of $283 million.
- Increased adoption of the company’s Opteon™ refrigerant in mobile applications.
- Interest coverage of 3.1x.
Chemours is currently engaged in a lawsuit with its former parent company, DuPont (NYSE:DD), who it claims massively underestimated the cost of environmental liabilities which Chemours ultimately absorbed when DuPont spun off its former performance chemicals unit in 2015. In spite of this, Chemours has been extremely successful since the spinoff, returning more than $1 billion to its shareholders in dividends and stock buybacks. The company’s 2025 bonds represent an outstanding opportunity for diversification into the industrial chemical industry and with its competitive yield-to-maturity of about 7.5%, make an excellent addition to Durig’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, the aggregated performance of which is shown below.
Lawsuit Against DuPont
The big news for the Chemours Company is the lawsuit it filed against DuPont, which spun off Chemours in 2015. The Chemours’ lawsuit claims that the chemical giant, DuPont, “orchestrated a spinoff of its Performance Chemicals unit into a new company it named Chemours as part of a plan to try to off-load its historical environmental liabilities.” The lawsuit goes on to claim that DuPont’s Project Beta, begun in 2013, was focused on restructuring the company, specifically the Performance Chemicals Unit (which eventually became Chemours). This unit made and sold industrial and specialty chemicals, which created chemical byproducts as part of their chemical processes. These byproducts “had given rise to many of DuPont’s environmental liabilities, including costly remediation of prior emissions and the need for substantial investment in pollution abatement technology.”
Of course, DuPont has stated that “We believe the claims made by Chemours are without merit.” DuPont continues to assert that it is entitled to unlimited indemnity from Chemours for many of its historic liabilities. Chemours seeks for the court to declare the indemnification clause from the spinoff as unenforceable, as well as reimbursement from DuPont primarily for the $3.9 billion dividend it extracted from Chemours at the time of the spinoff to help fund a stock buyback to ward off activist investor Trian Fund Management. The lawsuit is still ongoing. DuPont has asked for the case to be dismissed and resolved in arbitration.
Most importantly, in spite of the lawsuit, Chemours has been a very successful company since the spinoff in 2015, evidenced by the more than $1 billion it has returned to its shareholders in the form of dividends and stock buybacks. The company is not in danger of insolvency or unable to manage its liabilities.
Chemours Company Second Quarter Results
After filing the lawsuit in May, Chemours Company released its results for the second quarter (three months ending June 30, 2019) in August. Second quarter highlights included the following:
- Chemours generated net sales of $1.4 billion in Q2.
- Total Adjusted EBITDA for the second quarter totaled $283 million.
- In the second quarter, the company returned $108 million to shareholders through dividends and share repurchases.
- Despite negative free cash flow for Q2 as a whole, the company did generate positive free cash flow in the last month of the second quarter.
- Q2 also saw a solid global adoption of the company’s Opteon™ HFP refrigerant in mobile applications. Currently, Opteon™is the lowest GWP (global warming potential) product available.
Although not fully satisfied with the company’s second quarter performance, Chemours President and CEO, Mark Vergnano reiterated the company’s commitment to growth. “The second quarter was challenging on a number of fronts, including softer than expected Ti-Pure™ demand and the continued impact of illegal imports of HFC refrigerants into Europe. Both issues impacted our volumes in the second quarter and more than offset increasing adoption of Opteon™ mobile refrigerants in the United States and Asia, as well as productivity efforts. We are clearly not satisfied with these results and remain firm in our commitment to grow our businesses and improve the financial performance of Chemours.”
About the Issuer
The Chemours Company (NYSE: CC) helps create a colorful, capable and cleaner world through the power of chemistry. Chemours is a global leader in fluoroproducts, chemical solutions, and titanium technologies, providing its customers with solutions in a wide range of industries with market-defining products, application expertise and chemistry-based innovations. Chemours ingredients are found in refrigeration and air conditioning, mining and general industrial manufacturing, plastics and coatings. Our flagship products include prominent brands such as Teflon™, Ti-Pure™, Krytox™, Viton™, Opteon™, Freon™ and Nafion™. Chemours has approximately 7,000 employees and 28 manufacturing sites serving approximately 3,700 customers in North America, Latin America, Asia-Pacific and Europe. Chemours is headquartered in Wilmington, Delaware and is listed on the NYSE under the symbol CC.
Opteon and the Increasing Demand for Low GWP Products
According to a recently published report, the low GWP (global warming potential) refrigerants market is projected to reach USD 28.7 billion by 2023 from USD 16.5 billion in 2018, projected to grow at a compound annual growth rate of 11.7% between 2018 and 2023. A key driver for this increased demand is the low environmental impact of low GWP products, along with increasing legislation in developed countries to phase out CFC, HCFC and HFC refrigerants. Legislation like the F-gas legislation in the European Union and the SNAP program adopted by the U.S. government are aimed at reducing emissions from HFC’s (which contribute to ozone depletion).
In order to meet this increased demand, Chemours Company developed Opteon™, a more environmentally sustainable refrigerant that satisfies these increasingly stringent regulations. Opteon™ refrigerants have zero ozone depletion potential (ODP) and very low Global Warming Potential (GWP). The product has been well received. In Europe, Opteon™ has been a leading refrigerant in the supermarket refrigeration section and has helped companies comply with the F-gas regulations. In addition, several global companies have selected Opteon™ for their residential and commercial air conditioning applications, including Carrier, Mitsubishi Electric Hydronics, and Johnson Controls.
Although the first half of 2019 has not been as profitable as management (or shareholders) had hoped it would be, bondholders might see the picture a little differently. Interest coverage measures the ability of the issuer to service its existing debt level. For its most recent quarter, Chemours Company had operating income of $161 million and interest expense of $52 million. This calculates to a solid interest coverage of 3.1x.
The other metric investors might be interested in is liquidity level. This can be represented by cash on hand, as well as access to a revolving credit facility. Again, Chemours looks pretty solid, with its cash levels as of June 30, 2019 at $630 million and access to an additional $697 million on the company’s revolving credit facility.
The risk for bondholders is whether Chemours can recover from a less than stellar first half of 2019, restore free cash flow and regain sales momentum in its Titanium Dioxide (TiO2) products. (Titanium dioxide is widely used in industrial paints and coatings, plastics, cosmetics and some food items). In Q2, the company had a significant decrease in its sales of its Titanium Dioxide products. In 2018, 48% of the Chemours sales came from its TiO2 products. Management believes the Q2 decrease is due in part to the cyclical nature of the TiO2 industry, recent tariffs that have taken effect, plus the growing possibility of a recession by 2020. The company has recently unveiled a new online ordering portal for its TiO2 customers and has reported increased activity in TiO2 orders since launching that system.
In addition to the lawsuit Chemours filed against Dupont, a new class action lawsuit has emerged in the past week with investors of Chemours Company alleging that the defendants misled investors by representing that Chemours had appropriately accounted and accrued reserves for its environmental liabilities, that the possibility of costs exceeding accrued amounts was “remote,” and that, in any event, additional costs would not be material. With two major lawsuits now pending, an unfavorable outcome from either could have adverse effects on Chemours profitability.
Generally, there is reduced risk for investors who invest in Durig Capital’s FX2 managed portfolio due to its diversification across many bonds and industries, as compared to the purchase of individual bonds. Also, the FX2 portfolio has historically significantly outperformed when compared to portfolios where investors have chosen bonds individually.
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Summary and Conclusion
Chemours Company’s 2025 bonds are nearly investment grade. Despite the company’s struggles in its most recent quarter, it has outstanding products and committed customers. For bondholders, interest coverage is robust. And while impossible to predict the outcome of any pending litigation Chemours is involved in, the company’s products are still in demand, and as the CEO commented on the DuPont suit in the most recent earnings call, “Nowhere in the complaint is it alleged that Chemours currently fears insolvency, because we do not. Our company is on solid financial footing as reflected in our filings.” Chemours’ 2025 bonds are currently trading at a discount, giving them a desirable yield-to-maturity of about 7.5%. This competitive yield and diversification into industrial and specialty chemicals makes these bonds make an excellent addition to Durig’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio.
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Issuer: Chemours Company
Symbol: NYSE: CC
Ratings: Ba3 / BB-
Price: ~ 98.0
Yield to Maturity: ~ 7.5%
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Disclosure: Durig Capital and certain clients may hold positions in Chemours May 2025 bonds.
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