Moody’s Investors Service downgraded Avon Products Inc.’s corporate family rating, in part because the business is smaller now that the North America unit has been spun off.
“The downgrade reflects Avon’s smaller scale after the separation of its North American business, its higher exposure to potentially volatile emerging markets and the risks associated with successfully executing its new transformation plan,” said Moody’s senior vice president Linda Montag. “It also reflects concerns that challenging economic conditions in several of the company’s key regions will temper its ability to stabilize and then grow revenues and earnings in the near term.”
Moody’s downgraded Avon’s corporate family rating to Ba3 from Ba2, the probability-of-default rating to Ba3-PD from Pa2-PD and the senior unsecured instrument rating to B1 from Ba3, with a negative outlook. The agency also said that leverage at Avon will likely remain high through 2016 as the business implements its transformation plan and works to reinvigorate growth. Moody’s estimated Avon’s debt to earnings before interest, taxes, depreciation and amortization ratio will remain above five times in 2016, but will improve as Avon implements its plan to reduce $350 million in costs.
Avon sold its North America unit, now called New Avon, to private equity firm Cerberus Capital Management LP in March. Cerberus invested $435 million for a 16.6 percent stake in Avon Products and $170 million for 80 percent control of New Avon as part of the deal. Avon Products still owns 20 percent of New Avon.
In an interview, Montag added: “The separation of the North America business is a good thing for the company…as is the company’s decision to suspend its dividend. A lot of the markets they are now going to be more reliant on are emerging markets, and that comes with a certain amount of volatility.”
The beauty firm announced its transformation plan in January, saying it would shed $350 million in costs over a three-year period. The company is also cutting 2,500 jobs — 1,700 of them in 2016 — as part of the reorganization. Last month, Avon said its first-quarter losses widened to $165.9 million from $147.3 million a year earlier.
At the time, chief executive officer Sheri McCoy said first-quarter results were in line with expectations and that the company had not only sold off the North American unit and set down the path of cost savings but also reconstituted its board of directors.
“With these actions, we are well-positioned as we move forward aggressively to drive out cost, invest in growth and improve our financial flexibility,” McCoy said.