OREANDA-NEWS. S&P Global Ratings today assigned its 'B' corporate credit rating to Avon International Operations Inc. The outlook is stable.

Concurrently, we assigned our 'BB-' issue-level rating to AIO's existing $400 million senior secured revolving credit facility expiring 2020 and proposed $400 million senior secured notes due 2022. The recovery rating for these senior secured facilities is '1', indicating our expectation for very high (90%-100%) recovery in the event of a payment default.

AIO is the issuer of the proposed $400 million senior secured notes as well as the borrower under the company's existing $400 million senior secured revolving credit facility. Avon Products plans to use proceeds from the notes offering, along with about $250 million of cash, to purchase up to $650 million in aggregate principal of the company's 5.75% unsecured notes due March 2018, 4.2% unsecured notes due in July 2018, 6.5% unsecured notes due in March 2019, and 4.6% unsecured notes due in March 2020.

Pro forma for the transaction, we expect Avon Products' debt leverage to improve toward mid-5x at the end of 2016, from about 6x prior to the notes offering and planned tender offer. We expect credit metrics to remain weak for the next several years given its need to reinvest in its business and weak profitability.

"Our ratings on Avon reflect the company's persistently poor operating trends, its participation in the increasingly competitive beauty and personal care market, as well as its limited channel diversity," said S&P Global Ratings credit analyst Mariola Borysiak. "We expect the company's turnaround strategies and changes in its board to yield positive results; however, we expect progress to be slow and uneven given the highly competitive beauty landscape, high turnover of its sales representatives, narrow channel focus in direct selling, as well as the foreign currency headwinds and difficult macroeconomic conditions in Avon's key markets."

The stable outlook reflects S&P Global Ratings' expectation that Avon will benefit from its partnership with Cerberus and its business will stabilize because of its restructuring efforts. We expect debt leverage of less than 6x at the end of 2016 and improve thereafter toward the low-5x area in 2017.

We could lower the ratings if Avon's plan to turn around its declining performance fails and profitability continues to decline, such that we believe EBITDA coverage of interest will fall to about 1.5x. In addition we could consider lower ratings if we believe cushion to the company's financial covenants will narrow to below 10%.

We could raise our ratings if the company's turnaround initiatives gain traction such that we expect Avon to sustain debt leverage below 5x. We calculate that about 15% EBITDA growth and approximately $400 million debt reduction from our pro forma 2015 levels would result in debt leverage declining to below 5x.