NEW YORK--(BUSINESS WIRE)--Fitch Ratings has updated its analysis on the differences in Avon Products, Inc.'s (Avon) debtholder protection measures.
Avon Products, Inc. (Avon) filed the First Amendment to the $535 million of privately placed notes issued in November 2010 in an 8-K on Aug 20, 2012. The amendment fleshes out the terms previously disclosed by the company. However, some terms in the amendment widen the difference between various unsecured notes previously noted in Fitch's press release 'Bondholder Protection Measures Differ in Avon's Unsecured Notes', Feb. 11, 2011.
At June 30, 2012, Avon had $3.5 billion in debt. Except for approximately $77 million in capital leases, all of Avon's debt is unsecured and almost 86% is long term. Approximately 84% is issued by Avon, another 10% by Avon Capital Corporation (ACC) under an Avon guarantee, and the remaining 6% is issued through various international subsidiaries. Avon's $2,898 million in long-term debt is comprised of $1,725 million in long-term notes publicly issued at various times, $550 million in a three-year bank term loan, and three privately placed notes totaling $535 million along with a small amount in capital leases and other.
Significant Changes with the Amendment to Privately Placed Notes:
--Covenants can improve further. The amendment inserts a 'Most Favored Lender Provision'. The provision automatically incorporates any financial covenant in a Principal Credit Facility (generally where the amount outstanding or commitments is at least $100 million) that is not already in the notes that would be more beneficial to the noteholders unless waived by holders of more than 50% of the principal amount. Any new covenant would remain even with a waiver on compliance. New covenants would be automatically deleted or modified to align with changes in the Principal Credit Facility, unless there is an event of default.
--New covenant added. In addition to the previous financial covenant requiring interest coverage of at least 4 times (x) similar to the Bank Credit Agreement, a leverage covenant of 4x which declines to 3.75x beginning with the four fiscal quarters ended June 30, 2013 has been added. This new covenant is partially in line with the June 2012, $550 million term loan. However, the term loan reduces further to 3.5x beginning with the four fiscal quarters ended March 31, 2014.
The note-holders appear to be reserving the right to become more restrictive on or after March 31, 2014. The 3.75x is essentially fixed through Dec 31, 2013 but could change based on levels in the bank credit facility or other principal credit facilities.
--The amendment contains an interest step-up provision. If Avon's debt is rated below investment grade by two or more of the three ratings agencies the interest rate on each note increases by 150 basis points. However, it is noteworthy that the revolving credit pricing is based on a credit default swap floor and cap therefore lenders would automatically see price movements. The company has not borrowed under the revolving credit agreement. Through at least June 2012, Avon had access to the commercial paper market, though at less robust levels than in the past, with $330 million outstanding. Avon stated that it would not permanently repatriate overseas earnings in 2012 paving the way to use some of its offshore cash, if necessary. This could potentially limit any borrowing under its revolving credit facility.
Unchanged from the Original Privately Placed Notes:
--The guarantee of ACC and any Domestic Subsidiary that provides a Guaranty in favor of the banks under the Bank Credit Agreement.
--Subsidiary debt plus the aggregate amount of permitted liens is limited to 20% of Consolidated Total Assets. At June 30, 2012 Fitch estimates that debt at the subsidiary level may potentially be almost $1.5 billion (excluding approximately $77 million in leases). Presently, the overwhelming majority of the company's debt is issued by Avon Products, Inc. In the amendment debt at Avon's international subsidiaries was listed and totaled almost $227 million which is well below the lien threshold. Limitation on subsidiary debt is a positive for all note-holders as it places a cap on structural subordination as long as these notes are outstanding. The bank credit facility does not place any restrictions on subsidiary debt but in general limits liens to those occurring in the ordinary course of business plus $100 million.
--The threshold for the change of control triggering event is lower than public notes issued after 2007. A repurchase upon change of control triggering event is predicated on among other things, a person becoming a beneficial owner of more than 35% of the outstanding voting stock and two of the three major rating agencies downgrading the company's debt below investment grade.
--Avon or its subsidiaries will not engage in lines of businesses which are substantially different from the current businesses.
--If Avon, ACC or any Significant Subsidiary has a payment default of at least $100 million beyond the grace period, it is an event of default. Significant Subsidiaries include Avon Cosmeticos Ltda incorporated in Brazil, Avon International Holdings Company of the Cayman Islands and Avon International Operations, Inc. of Delaware. Per the list in the amendment, there is no material amount of debt at any significant subsidiary.
Public Notes issued from 2003 - 2006:
Holders of these securities have the least favorable terms. While there are covenants such as limitation of liens to 20% of Consolidated Net Tangible Assets, etc., these notes do not have the change of control feature found in later notes (see below). Additionally, while the notes share the same $100 million cross-default amount as the privately placed notes, it is at the Avon issuer level only.
Outstanding issuances totaling $375 million are comprised of:
--$125 million 4.625% notes due May 2013;
--$250 million 4.2% notes due July 2018.
Public Notes issued since 2007:
In addition to the existing terms and conditions found in the 2003-2006 vintage these notes also offer additional protection to note-holders in the form of a repurchase upon a change of control triggering event. The triggering event is predicated on, among other things, a person becoming a beneficial owner of more than 50% of the outstanding voting stock and each of the three rating agencies downgrading Avon's debt to below investment grade. In this event, Avon must make an offer to repurchase all or any part of the notes at 101% plus any accrued and unpaid interest. However, there are no material early triggers or additional compensation for normal credit events such as those found in the privately placed notes.
Currently outstanding publicly placed notes issued since 2007 total $1.350 billion. The four notes within the $1.350 billion encompass the following:
--$250 million 4.8% notes due March 2013;
--$500 million 5.625% notes due March 2014;
--$250 million 5.75% notes due March 2018; and
--$350 million 6.5% notes due March 2019.
Fitch currently rates Avon and its subsidiary as follows:
Avon
--Long-term Issuer Default Rating (IDR) 'BBB-';
--Bank credit facilities 'BBB-'
--Senior unsecured notes 'BBB-'
--Short-term IDR at 'F3';
--Commercial paper program 'F3'.
Avon Capital Corporation
--Short-term IDR 'F3';
--Commercial paper 'F3'.
Commercial paper issuances by Avon Capital Corporation are fully guaranteed by Avon.
The Rating Outlook is Negative.
What Could Trigger A Rating Action:
Future developments, that may individually or collectively lead to a negative rating action include:
--Lack of material improvement from recent earnings trends, and debt at current or higher levels, putting pressure on leverage and covenant compliance. Fitch notes that the leverage covenant in the $550 million term loan and $535 million in privately placed notes tighten after March 31, 2013 from 4x to 3.75x for the remainder of 2013. The term loan tightens further to 3.5x after 2013.
Future developments, that may nonetheless potentially lead to a positive rating action include:
--The Outlook could return to Stable if earnings and cash flow rebound or show positive traction to stabilization and growth during 2013. Stabilization or growth in active representatives is also critical.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Fitch Affirms Avon's IDRs at 'BBB-/F3'; Outlook Revised to Negative' (Aug. 10, 2012).
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