Moody's Downgrades Avon Products (AVP) CFR to 'Ba3'; Notes Smaller Scale, Separation of NA Business

Moody's Investors Service, downgraded Avon Products, Inc.'s (NYSE: AVP) Corporate Family Rating (CFR) to Ba3 from Ba2, Probability of Default Rating (PDR) to Ba3-PD from Ba2-PD, and the senior unsecured instrument rating to B1 from Ba3, concluding the review that was initiated in December 17, 2015. The rating outlook is negative.

"The downgrade reflects Avon's smaller scale after the separation of its North American business, its higher exposure to potentially volatile emerging markets, and risks associated with successfully executing its new transformation plan" said Linda Montag, Moody's Senior Vice President. "It also reflects concerns that challenging economic conditions in several of the company's key regions will temper its ability to stabilize and then grow revenues and earnings in the near term," added Montag.

The separation of the unprofitable U.S. business in a deal with Cerberus capital Management L.P. and the company's plans to reduce debt by $250 million with the proceeds of the transaction are both credit positive. However financial leverage will remain high until Avon can execute its transformation plan and reinvigorate growth. Moody's expects that debt/EBITDA will likely remain above 5 times in 2016 as Avon incurs restructuring costs in the short run, but will improve as the company implements plans to take out some $350 million in costs over three years. While restructuring will allow the cost base to become better aligned with its mostly foreign sourced revenue, as a U.S.-reporting company Avon will be exposed to foreign currency fluctuations. This is likely to be a headwind for the foreseeable future.

The following ratings were downgraded:

Avon Products, Inc.:

Corporate Family Rating to Ba3 from Ba2

Probability of Default Rating to Ba3-PD from Ba2-PD

Senior unsecured rating to B1 (LGD5) from Ba3 (LGD5)

Senior unsecured shelf to (P)B1 from (P)Ba3.

Ratings affirmed:

Speculative Grade Liquidity Rating at SGL-2

The outlook is negative.

RATINGS RATIONALE

Avon's Ba3 CFR reflects very high financial leverage, and its high concentration in broadly growing but potentially volatile developing markets. It also reflects structural challenges associated with the direct sales distribution model and declines in the active representative base in some markets. Avon also faces execution risks associated with its transformation plans and currency volatility. Moody's expects that free cash flow will be modest in 2016 as the company absorbs costs associated with its restructuring plan.

The rating is supported by the strength of its brands and good geographic diversification. Moody's views positively Avon's public commitment to improve its balance sheet through cost take-outs, debt repayment, and suspension of its dividends.

The SGL-2 Speculative Grade Liquidity rating reflects good liquidity, supported by the company's $400 million revolver, which Moody's expects will remain undrawn. It also reflects Moody's comfort with Avon's $700 million of cash available to fund restructuring initiatives and reduce debt.

The negative outlook reflects the risks associated with executing the transformation plan and reinvigorating growth in the face of economic challenges in certain key markets.

The ratings could be lowered if Moody's comes to expect that Avon's credit metrics will weaken as a result of deteriorating operating performance, if there are major delays in the realization of cost savings, or if liquidity erodes. Quantitatively, if debt to EBITDA is not reduced to below 5 times in the next 12 to 18 months, Avon's ratings could be downgraded.

An upgrade would be dependent on Avon sustaining improvement in its financial performance and successfully executing its turnaround initiatives. If the company is able to show good business momentum and profit growth across major markets, maintain debt to EBITDA of 3.5 times or below, and improve EBIT margins to 10% or above, the ratings could be upgraded.

Please see the credit opinion on moodys.com for additional information on Avon's ratings.

The principal methodology used in these ratings was Global Packaged Goods published in June 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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