S&P Assigns 'B+' Rating to Revlon (REV); Outlook is Negative

S&P Global Ratings affirmed its 'B+' corporate credit rating on Revlon Consumer Products Corp. (RCPC) and removed the rating from CreditWatch negative where we placed it on June 17, 2016, following the company's announcement of its plans to acquire Elizabeth Arden. At the same time we assigned our 'B+' corporate credit rating to Revlon Inc. (NYSE: REV), the parent company of RCPC. The outlook is negative.

Concurrently, we assigned our 'B+' issue-level rating to the company's proposed $1.8 billion term loan B maturing in 2023. The recovery rating is '3', indicating our expectation for meaningful recovery in the event of default at the higher end of the 50% to 70% range. We do not rate the company's proposed $400 million asset-based lending (ABL) revolving facility due 2021. RCPC is the borrower under these debt instruments.

We raised our issue level rating on the company's existing $500 million senior unsecured notes to 'B+' from 'B' and revised the recovery on the notes to '4' from '5'. The '4' recovery rating indicates our expectation for average recovery, at the lower end of the 30% to 50% range.

The company plans to use proceeds from the term loan, along with $100 million borrowings under its new $400 million revolver to fund the acquisition of Elizabeth Arden, refinance its existing term loans, and repay existing Elizabeth Arden debt.

"Our rating on Revlon reflects our belief that the acquisition of Elizabeth Arden will add new product categories to its portfolio, increase the number of channels it competes, as well as enhance its scale and geographic footprint. We base the negative outlook on our expectation that Revlon's leverage pro forma for the acquisition of Elizabeth Arden will increase to about 6x at end of fiscal 2016," said credit analyst Mariola Borysiak. "This is above our previous expectation for debt leverage remaining below 5.5x. The negative outlook also incorporates our view that leverage could remain in the high 5.0x area if Revlon incurs difficulty integrating Elizabeth Arden, which has had whose operating performance has been weak since 2014."

Our negative rating outlook reflects the deterioration of credit measures that will result from the proposed acquisition and the risk that Revlon may not improve metrics to levels that support the rating, which could occur if the anticipated growth and synergies fail to materialize. A lower rating could result if we expect the company's debt to EBITDA ratio will remain elevated in the high-5x area at the end of 2017.

A positive rating action (revision of the outlook back to stable) would be predicated on our belief that the company successfully integrates Elizabeth Arden and at least maintains recently stabilized performance at this brand, while achieving modest growth at Revlon. Based on this scenario, we would expect the company to reduce debt leverage toward 5x within a year from closing of the acquisition. We calculate that about 12% EBITDA improvement from our projected pro forma levels at 2016 and modest debt reduction would result in debt leverage decreasing below 5.5x at the end of fiscal 2017.

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