UPDATE: S&P Cuts Avon Products (AVP) to Junk

(Updated - November 3, 2014 3:25 PM EST)

Standard & Poor's Ratings Services today lowered its corporate credit rating on New York, N.Y.-based Avon Products Inc. (NYSE: AVP) to 'BB+' from 'BBB-'. The outlook is stable.

We also lowered our issue-level rating on the company's senior unsecured debt to 'BB+' from 'BBB-', and assigned a '3' recovery rating, indicating our expectation for meaningful (50% to 70%) recovery in the event of a payment default.

At the same time, we withdrew our 'A-3' short-term commercial paper rating as the program is now closed.

The downgrade of Avon reflects the company's slower-than-expected progress in turning around its operating issues and continued weak operating performance. "Some of the company's issues are deeper than we anticipated, particularly in the U.S., where active representatives and sales declines have been material, and in Brazil, where the company is facing softening macroeconomic conditions and a heightened competitive environment," said Standard & Poor's credit analyst Jacqueline Hui. "As a result, overall sales and the number of active representatives have declined, and the company has lost market share. While the company still has good geographic diversity, many of its key markets are experiencing sales weakness and we believe it will take time to re-engage its active representatives and rebuild sales growth."

Standard & Poor's estimates Avon's credit metrics have weakened, with leverage increasing to about 3.2x for the 12 months ended Sept. 30, 2014, compared to about 2.6x in the prior year, mainly as a result of decreased profitability. We believe margins will modestly improve as the company continues to right-size its cost structure and improve operating efficiencies, but that overall progress will be gradual and that margins will remain below historical levels in the mid-teens. We are not projecting further material debt reduction, but we believe credit metrics will slowly improve.

The stable outlook reflects our view that Avon should be able to maintain credit measures near current levels, including leverage near 3x, despite our expectation for slow progress over the next year.

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Growth isn't weak enough to truly undercut inflation pressures - BMO
• Deutsche Bank Upgrades Westlake Chemical (WLK) to Buy
• Nasdaq, S&P tumble as Netflix, chip stocks drag; AmEx boosts Dow