New York, November 12, 2012 -- Moody's Investors Service affirmed the Baa1 long-term senior unsecured rating of Avon Products, Inc. ("Avon") and the short-term rating of Avon Capital Corporation ("Avon Capital") at Prime-2 but revised the outlook to negative. The affirmation of Avon's Baa1 rating reflects Moody's expectation that the company's financial performance will improve modestly over the next 12 to 18 months but that credit metrics will likely still remain weak for the company's current rating. Specifically, profitability, free cash flow and leverage should improve driven by better productivity in key international growth markets, more disciplined working capital management and more conservative financial policies.
Avon Capital's Prime-2 short-term commercial paper rating is supported by a good liquidity profile characterized by high offshore cash balances and Moody's expectation that the company will remain in compliance with all of its financial covenants or obtain necessary waivers. Moody's also expects Avon to renew its $1 billion committed revolving credit facility prior to its expiration in November 2013 and refinance its near-term maturities. Avon Capital is guaranteed by Avon Products, Inc.
The negative outlook reflects the risk that the improvement in credit metrics over the next 12 to 18 months will not be sufficient to maintain the current Baa1 rating due to the risks associated with the company's multi-year turnaround.
The following ratings of Avon were affirmed:
- Senior unsecured debt rating at Baa1
- Senior unsecured shelf at (P)Baa1
The following rating of Avon Capital Corporation was affirmed:
- Commercial paper rating at Prime-2
The outlook is negative.
Avon's Baa1 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 weak 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. 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 good liquidity profile supported by substantial offshore cash holdings of nearly $1 billion.
Avon's ratings could be downgraded if the company fails to reinvigorate sales growth to at least mid-single digit organic rates or credit metrics deteriorate such that its EBITA margins are sustained below 9%, retained cash flow to net debt is sustained below 25% or EBITA to interest expense is sustained below 5.25 times.
An upgrade would require Avon to demonstrate that its turnaround initiatives are successful, that certain operational and execution related problems have been addressed, and 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 EBITA margins are at least 12%, retained cash flow to net debt is sustained above 30% and/or EBITA to interest expense is sustained above 7.0 times.
The principal methodology used in rating Avon was the Global Packaged Goods Industry Methodology published in July 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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 twelve months ended September 30, 2012 were approximately $11.2 billion.
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Janice Hofferber, CFA Senior Vice President Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Peter H. Abdill, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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