Fitch Rates Avon's $1.5B Unsecured Notes 'BB+'
NEW YORK -- March 7, 2013
Fitch Ratings has assigned a 'BB+ ' rating to Avon Products, Inc.'s (Avon)
$1.5 billion senior unsecured notes issuance with the following tranches:
--$250 million due in 2016;
--$500 million due in 2020;
--$500 million due in 2023;
--$250 million due in 2043.
The Rating Outlook is Stable.
Avon intends to use the net proceeds, together with cash on hand, to refinance
upcoming maturities and for general corporate purposes. Today's action is in
alignment with management's goal of addressing the company's capital
The new notes contain a Change of Control Repurchase Event provision and
interest step-up language. Upon the occurrence of both a Change of Control and
rating downgrades below investment grade by two of the three rating agencies,
unless Avon exercises its right to redeem the notes, the company will be
required to make an offer to purchase the notes at a price equal to 101% of
the aggregate principal amount plus accrued and unpaid interest. The note
indenture contains limitations on liens and sale-leasebacks but does not
contain financial covenants. Interest could be increased by a maximum of 200
basis points in addition to the stated rate at issuance based on the company's
Fitch notes that Avon's $550 million three-year term loan requires that if the
company raises at least $500 million in new debt, 50% of the net proceeds must
be applied towards this facility. With $1.5 billion in gross proceeds Avon
should be able to refinance the $600 million in privately placed notes
including the $65 million make-whole and the $125 million 4.625% note due May
13, 2013 while still applying at least $500 million in required net issuance
proceeds to its $550 million term loan due in 2015.
KEY RATING DRIVERS:
Avon's ratings are based on the continued decline in U.S. revenues, lack of
sustainable operating income growth in key international markets, and weakened
credit protection measures. Liquidity is likely to be lower versus historical
levels as the company uses part of its cash to invest in restructuring,
representative incentives, and other efforts to stabilize the business.
Fitch recognizes that while there were some early signs of stabilization in
Avon's Latin American and European segments which generate almost 90% of
operating earnings before corporate overhead, it is too early to ascertain its
sustainability. The emerging markets have proven to be a strong base of
operations for the direct-selling distribution model; however, the level of
competition has increased with marketers such as L'Oreal S.A. accelerating
their investments in the region. Both Natura Cosmeticos S.A. and Avon have
commented about the high level of competition in Brazil in the past several
years. Given the increased presence of large multinational beauty care
companies and further maturation of the emerging markets, Fitch believes that
Avon is likely to find it more difficult to return to sustainable growth and
that longer-term operating margin expansion may be limited.
The Stable Outlook is due to Avon's adequate liquidity and execution of its
plan to address its capital structure, which should allow management more time
to execute its strategic goals. Fitch is encouraged by a number of the
company's recent announcements or results. First, Avon cut its dividend by
almost 75%, a deeper level than Fitch expected. While 2012's free cash flow
(FCF) remained negative at $2 million, reducing the dividend outlay by $300
million should result in positive FCF in 2013 even if the company's financial
performance were to remain flat. Nonetheless, FCF is benefitting from the
dividend cut and working capital improvements, while cash flow from operations
continued a four-year decline from $782 million to $556 million at the end of
2012. Second, the company was able to reduce debt by more than $110 million
year over year given $337 million of FCF in the fourth quarter.
Consolidated revenues were essentially flat at $10.7 billion excluding a 5%
drag from negative foreign exchange. Sales in Latin America increased 5% on a
constant currency basis while sales in North America, Asia Pacific, and EMEA
(Europe, Middle East, and Africa) declined 8%, 5%, and 1%, respectively.
Consolidated adjusted EBIT margins (excluding impairments and restructuring
charges) increased almost sequentially during the year from 3.8% to 9.2%.
After years of leverage creep to a peak of approximately 3.5x in mid-2012,
Avon's leverage tracked down modestly to 3.2x.
Liquidity and Financial Flexibility:
Avon announced that it has notified the holders of its $535 million privately
placed notes that it will redeem those notes and make a required make-whole
premium of approximately $65 million by the end of March 2013. The company
cited that it is able to fund the redemption from cash on hand overseas. The
company is also renegotiating its $1 billion revolving credit which is
scheduled to mature in November 2013. Fitch expects that the company will be
able to secure a new credit agreement. As mentioned previously, Avon has $125
million 4.625% notes due May 13, 2013. The company also has a 5.75%, $500
million notes due March 1, 2014. The $550 million term loan amortizes by $138
million in 2014.
Positive: Future developments that may, individually or collectively, lead to
a positive rating action include:
Although a positive rating action is not likely in the next 18 months,
leverage in the low- to mid-2x range due to a restoration of consistent growth
in Avon's major markets, a meaningful increase in operating earnings and cash
flow, or greater than expected debt reduction, could lead to consideration of
an upgrade. Generating FCF in excess of $200 million annually would also be
Negative: Future developments that may, individually or collectively, lead to
a negative rating action:
Leverage maintained over 3x and diminishing FCF due to further deterioration
of its base business, indicated by declining sales and margins in key
geographical segments, or increased debt levels could result in a downgrade.
Declining volumes and sales representative count in the key market of Latin
America and Europe would also be viewed negatively.
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
--'Fitch Rates Avon's $500MM Term Loan 'BBB-' (July 5, 2012);
--'Fitch: Avon's Private Placement Notes Contain Favorable Terms' (Aug 22,
--'Fitch Downgrades Avon's IDR to 'BB+/B' (Feb. 26, 2013).
Applicable Criteria and Related Research
Corporate Rating Methodology
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Grace Barnett, +1-212-908-0718
Fitch Ratings, Inc.
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Judi M. Rossetti, CFA, CPA, +1-312-368-2077
Mark Oline, +1-312-368-2073
Media Relations, New York
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