S&P Downgrades Avon Products (AVP) Two-Notches to 'B+'; Outlook Stable

Standard & Poor's Ratings Services today lowered its corporate credit rating on Avon Products (NYSE: AVP) to 'B+' from 'BB'. The outlook is stable.

At the same time, we lowered our issue-level ratings on all of Avon's senior unsecured debt to 'B+' from 'BB', including its multiple senior unsecured issuances. The recovery rating remains '3', indicating our expectation for meaningful (50% to 70%, at the higher end of the range) recovery for lenders in the event of a payment default or bankruptcy. Total debt outstanding as of March 31, 2015, was about $2.6 billion.

"Our two-notch downgrade on Avon is a result of our downward assessment of the company's business risk profile and revised forecast for reduced financial performance, resulting in weaker projected credit metrics," said Standard & Poor's credit analyst Jacqueline Hui. This is due to the company's persistent operational issues and increasing external headwinds (such as foreign currency exchange risk and soft macroeconomic conditions in key markets) that have contributed to greater-than-expected weakness in operating results. As the company continues to right size its cost base, its sales also continue to decline at greater-than-anticipated rates. This is partially due to a severe negative impact from foreign currency exchange but also to the loss of active representatives over recent years and a highly competitive global beauty landscape.

The stable outlook reflects our view that the company's liquidity will remain adequate and that it will be able to meet our base-case projections, including FFO cash interest coverage in the mid-2x area over the next year. This is despite our forecast for weaker operating results and credit metrics.

We could lower the ratings if operating performance and cash flows fall below our downwardly revised forecast, perhaps as a result from the inability to stem active representative declines or offset negative foreign currency headwinds. This could lead to a further deterioration of credit metrics, including FFO cash interest coverage below 2x, which would point to a lower rating. We estimate for this to occur, EBITDA would need to decline about 10% from our base case.

Although unlikely over the next year, we could consider raising the rating if Avon can demonstrate stabilization in market share (particularly in Brazil) and margins, leading to improved cash flow generation and credit metrics, such that FFO cash interest coverage is over 4x on a sustained basis. For this to occur, EBITDA would need to increase about 35% from our base case.

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