NEW YORK--()--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 structure.
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 ratings.
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 viewed positively.
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 investors.
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, 2012);
--'Fitch Downgrades Avon's IDR to 'BB+/B' (Feb. 26, 2013).
Applicable Criteria and Related Research
Corporate Rating Methodology