(The following statement was released by the rating agency)
NEW YORK, March 07 (Fitch) Fitch Ratings has assigned a 'BB+ '
rating to Avon
Products, Inc.'s (Avon) $1.5 billion senior unsecured notes
issuance with the
--$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
The new notes contain a Change of Control Repurchase Event
interest step-up language. Upon the occurrence of both a Change
of Control and
rating downgrades below investment grade by two of the three
unless Avon exercises its right to redeem the notes, the company
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
contains limitations on liens and sale-leasebacks but does not
covenants. Interest could be increased by a maximum of 200 basis
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
be applied towards this facility. With $1.5 billion in gross
should be able to refinance the $600 million in privately placed
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
levels as the company uses part of its cash to invest in
representative incentives, and other efforts to stabilize the
Fitch recognizes that while there were some early signs of
Avon's Latin American and European segments which generate
almost 90% of
operating earnings before corporate overhead, it is too early to
sustainability. The emerging markets have proven to be a strong
operations for the direct-selling distribution model; however,
the level of
competition has increased with marketers such as L'Oreal S.A.
investments in the region. Both Natura Cosmeticos S.A. and Avon
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
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
recent announcements or results. First, Avon cut its dividend by
almost 75%, a
deeper level than Fitch expected. While 2012's free cash flow
negative at $2 million, reducing the dividend outlay by $300
result in positive FCF in 2013 even if the company's financial
to remain flat. Nonetheless, FCF is benefitting from the
dividend cut and
working capital improvements, while cash flow from operations
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%,
Consolidated adjusted EBIT margins (excluding impairments and
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
leverage tracked down modestly to 3.2x.
Liquidity and Financial Flexibility:
Avon announced that it has notified the holders of its $535
placed notes that it will redeem those notes and make a required
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
mature in November 2013. Fitch expects that the company will be
able to secure a
new credit agreement. As mentioned previously, Avon has $125
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
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
its base business, indicated by declining sales and margins in
segments, or increased debt levels could result in a downgrade.
volumes and sales representative count in the key market of
Latin America and
Europe would also be viewed negatively.
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Judi M. Rossetti, CFA, CPA
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
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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