Moody's Cuts Avon (AVP) Senior Unsecured Debt Rating to Baa2, Outlook Stable

February 28, 2013 11:02 AM EST Send to a Friend
Moody's Investors Service lowered Avon Products, Inc. (NYSE: AVP) senior unsecured debt rating to Baa2 from Baa1 and affirmed the short-term rating of Avon Capital Corporation ("Avon Capital") at Prime-2. The ratings outlook is stable.

The rating downgrade to Baa2 reflects Moody's view that while Avon's credit metric improvement will position the company well relative to other Baa2 consumer product issuers, such improvement will not be sufficient to maintain the prior Baa1 rating. On a proforma basis, including recent operating stabilization in key markets and management's recently announced plans to delever by repatriating cash in the first quarter, Avon's debt-to-EBITDA and retained cash flow-to-debt ratios are exptected to improve to less than 3.5 times and approximately 30%, respectively.

"While Avon's substantial global scale and exposure to attractive direct selling channels of distribution for relatively low-priced beauty, fashion, and home products is a significant positive credit factor, we expect the pace of additional improvements in Avon's organic growth and profitability will be relatively slow" says Moody's Senior Vice President Janice Hofferber.

"Moody's does expect, however, steady progress as Avon leverages its strong competitive advantage as the leading direct seller in many developing markets. Moody's also expects that financial policies will remain conservative recognizing that recent actions to reduce the common stock dividend and to repatriate cash in order to reduce debt are beneficial to bondholder protection" adds Ms. Hofferber.

The stable outlook reflects Moody's expectation for improvement in Avon's operating performance over the next 12-18 months, but still reflecting a Baa2 credit profile. Specifically, profitability, free cash flow and leverage should improve driven by better productivity in key international growth markets and more disciplined working capital management. Over the next 12 to 18 months, Moody's expects steady recovery in operating and financial performance including organic growth of low-to-mid single digits, debt-to-EBITDA approaching 3.0 times and EBIT-to-interest coverage to remain comfortably above 4.5 times despite higher interest costs (including Moody's standard analytic adjustments).

Avon Capital's Prime-2 short-term commercial paper rating is supported by an excellent liquidity profile characterized by significant offshore cash balances albeit somewhat reduced from previous levels as a result of company's planned repayment of approximately $600 million in private placement notes. Moody's also expects Avon to renew its $1 billion committed revolving credit facility under favorable terms prior to its expiration in November 2013.

The following ratings of Avon were downgraded:

- Senior unsecured debt rating to Baa2 from Baa1

- Senior unsecured shelf to (P)Baa2 from (P)Baa1

The following rating of Avon Capital Corporation was affirmed:

- Commercial paper rating at Prime-2

The outlook is stable

RATINGS RATIONALE:

Avon's Baa2 senior unsecured rating reflects its position as the world's largest direct selling company, its strong brand recognition, and broad geographic diversification, especially in higher growth developing markets. Avon's ratings are constrained by its modest free cash flow due to elevated capital spending requirements and high working capital needs as well as the recent volatility in active representative and organic revenue growth trends. Improving profitability is further challenged by the highly competitive nature of the global beauty and personal care category which has required Avon to sustain high levels of brand advertising and representative investments. Moody's notes that Avon remains at a competitive advantage in key emerging markets as the leader in the direct selling channel and its emphasis on low-priced beauty and fashion and home products. The ratings also reflect the risks inherent in a direct selling model, even when this business model is well-managed. Avon Capital's Prime-2 short-term rating reflects its excellent liquidity profile supported by sizable offshore cash holdings.

A ratings upgrade would require Avon to demonstrate that its turnaround initiatives are successful, that certain operational and execution related problems have been addressed, and that growth in active representatives and organic sales are restored to mid-single digit levels. Accordingly, Avon's credit metrics would need to improve such that EBIT margins approach double digit, retained cash flow-to-net debt is sustained above 30% and EBIT-to-interest expense is sustained above 5.0 times.

Avon's ratings could be downgraded if the company fails to sustain its current profitability and margins or if credit metrics deteriorate such that retained cash flow-to-net debt is sustained below 20% or EBIT-to-interest expense is sustained below 4.0 times.

Avon Products, Inc., based in New York City, is the world's leading direct seller of beauty-related products and fashion jewelry with a worldwide independent direct sales force of approximately 6.4 million independent representatives. The company's product categories include Beauty, comprised of cosmetics, fragrances, skin care, and toiletries; Beauty Plus, comprised of jewelry, watches, apparel, and accessories; and Beyond Beauty, comprised of home, gift, and decorative products. Avon's revenues during the fiscal year ended December 31, 2012 were approximately $11 billion.

The principal methodology used in this rating was Global Packaged Goods published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.


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