Fitch Ratings has assigned a BB+/RR1 rating to Avon International Operations Inc.’s new notes and confirmed its negative rating outlook.
The firm assigned the rating to Avon’s 7.875 percent $500 million senior secured notes and the company’s senior secured revolver. The new capital, in connection with proceeds from Avon’s $435 million investment from Cerberus Capital Management from the spin-off of Avon North America, will be used to redeem up to $650 million of the $1.35 billion in unsecured notes that mature between 2018 and 2020. Fitch called the transaction leverage neutral.
Avon originally said it would offer $400 million in notes, but increased that amount to $500 million on Thursday evening. The transaction is expected to close some time this month. “We’ve launched a new secured bond issuance along with a tender offer,” an Avon spokeswoman said. “These financing transactions will reduce our leverage as previously committed, extend our maturity profile and continue to strengthen our balance sheet.”
Fitch said its overall negative outlook for the business reflects Avon’s declining earnings before interest, taxes, depreciation and amortization “due to its challenged business model and exposure to weak markets such as Brazil and Russia.”
Avon reported an 8 percent year-over-year revenue decline for the quarter ended June 30. Revenue dipped across Avon’s product categories for the quarter. Skin care brought in $417.6 million, a 7 percent decline; fragrance brought in $361.4 million, an 8 percent decline, and color cosmetics brought in $254.3 million, a 6 percent drop, compared to the prior-year period. On a constant-currency basis, skin care grew 4 percent, fragrance gained 5 percent and color grew 6 percent. In certain regions, Avon reported increases in revenue growth, and is in the midst of executing a transformation plan intended to save the company $350 million over the course of three years.
Fitch said it “experts 2016 earnings before interest, taxes, depreciation and amortization to decline around 10 percent to approximately $475 million from the $520 million level in 2015, on weak currency and continued challenges in both the company’s business and macro conditions of key markets.”
On Tuesday, Moody’s assigned Avon’s new notes a Ba1 rating and said its negative outlook remained unchanged.