OREANDA-NEWS. Fitch Ratings has assigned a 'BB+/RR1' rating to Avon International Operations, Inc.'s (Avon International) newly issued 7.875% $500 million senior secured notes and the company's senior secured revolver.

The new notes, in combination with proceeds from the company's $435 million preferred equity investment from Cerberus Capital Management (Cerberus), will be used to redeem up to $650 million of the $1.35 billion senior unsecured notes maturing between 2018 and 2020. Given Fitch's treatment of the Cerberus investment as 50% debt, the transaction and refinancing are essentially leverage-neutral.

Fitch has also affirmed its existing ratings on Avon Products, Inc. (Avon), with the Long-Term IDR affirmed at 'B+'. The Negative Rating Outlook continues to reflect the company's declining EBITDA trend, due to its challenged business model and exposure to weak markets such as Brazil and Russia. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

While 2016 results have continued to show declines in unit volumes and EBITDA, the declines have moderated, in line with Fitch's expectation. The recently reported second quarter showed signs of operating stability, including constant currency revenue growth globally (+5%) and in the key markets of Brazil (+2%), Russia (+15%), Mexico (+7%) and the Philippines (+6%). Active representative count was up 1% globally, with gains in all geographic divisions except Asia Pacific. In addition, the company appears to be on track with its recently announced $350 million Transformation Plan, with $90 million in expense reductions identified in 2016.

Despite these positives, Fitch expects 2016 EBITDA to decline around 10% 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. Longer term, Fitch's confidence in the company's ability to reverse the over 50% EBITDA decline from $1.1 billion in 2013 is limited by macro challenges in markets like Brazil and Russia, increased competition in many markets, and questions regarding the future of the company's direct selling model.

Although Fitch's Outlook on Avon remains Negative on these challenges, the agency acknowledges that the company has recently taken a number of positive steps. The Cerberus investment and dividend suspension provided the company with incremental liquidity while the sale of the EBITDA-neutral North American business allows the company to focus on its profit-driving geographies. Avon's Transformation Plan, if successful, will stem EBITDA declines while allowing the company to invest in growing the business. The $650 million refinancing significantly reduces the company's 2018 - 2020 maturities, a positive step given Transformation-related cash costs (approximately $150 million pretax) will limit the company's free cash flow (FCF) through 2017.

Stabilization of the Outlook would be dependent on a continued constant currency revenue growth track record and further achievement of planned expense reductions. Together, these factors would yield greater confidence in both an EBITDA trough in 2016 and in Avon's longer-term ability to stabilize businesses trends.

KEY ASSUMPTIONS

--Revenue (excluding North America) is expected to decline approximately 12% to $5.4 billion in 2016 due to negative foreign currency, with constant currency growth expected in the low-single digits. Revenue growth is expected to be modestly positive on an annual basis beginning 2017, barring further currency movements;

--EBITDA, which was approximately $520 million excluding North America in 2015, is projected to decline around 10% to $475 million in 2016, due primarily to the impact of weak foreign currencies in Avon's operating markets. Fitch expects that the combination of modest revenue growth and cost saves could drive EBITDA toward the mid-$500 million level by 2018.

--Free cash flow (FCF) is expected to be flattish in 2016 and 2017 and around $100 million in 2018 on EBITDA growth and the substantial completion of Transformation cash costs in 2017. Fitch assumes the company's dividend remains suspended through the forecast period.

--Leverage, which was 4.2x in 2015, is expected to increase to around 4.8x in 2016 on lower EBITDA, and improve toward 4.0x thereafter on EBITDA improvement.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action:

Stabilization of the Outlook is based on sustaining flat-to-modestly positive rep growth as well as low-single digit organic growth. While pricing may drive the bulk of organic growth in the near term, Fitch expects positive volume to also be a contributor.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Continued sales declines, which would be exemplified by active reps and volume being sustained in the low-single-digit range;

--EBITDA sustained below $500 million after 2016;

--Reduced confidence in positive FCF after 2017. While the company has ample liquidity and can fund cash shortfalls with cash on hand, continued negative/flattish FCF would be of concern;

--Sustained increases in leverage over 5x;

--Currency challenges in significant markets such as Brazil and Russia. Avon's debt is dollar-based and cash flow for debt service over the intermediate term would be based on offshore cash generation.

LIQUIDITY

Cash balances are unrestricted and available for debt repayment and were $742 million as of June 30, 2016. Including full availability on its $400 million revolver that matures in 2020, total liquidity was approximately $1.1 billion.

Fitch expects FCF (operating cash flow less capital expenditures and dividends) to be essentially flat in 2016 and 2017.

Fitch treats the $433.6 million preferred equity outstanding as of June 30, 2016 as 50% debt under the Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analyst criteria.

ISSUE RATINGS BASED ON RECOVERY ANALYSIS

For issuers with IDRs at 'B+' and below, Fitch performs a recovery analysis for each class of the issuer's obligations. The issue ratings are derived from the IDR and the relevant Recovery Rating (RR) and notching, based on Fitch's recovery analysis that places an enterprise value under a distressed scenario of approximately $1.6 billion as of June 30, 2016 for Avon. This enterprise value is based on a $400 million EBITDA in a distressed scenario at a 4.0x EV/EBITDA multiple, which is at the low end of recent consumer products transactions but considers Avon's operating challenges.

Avon International's senior secured revolver and the new senior secured notes are expected to have outstanding recovery prospects (91% - 100%) and as such are rated 'BB+/RR1'. The revolver and notes are secured by Avon International Operations, Inc., a wholly owned subsidiary of Avon, and are guaranteed by Avon. Avon's senior unsecured notes are expected to have average recovery prospects (31% - 50%) and are rated 'B+/RR4'.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Avon Products, Inc. (Avon)

--Long-Term IDR at 'B+';

--Senior unsecured notes at 'B+/RR4';

--Short-Term IDR at 'B'.

Fitch has assigned the following ratings:

Avon International Operations, Inc. (Avon International)

--Long-Term IDR at 'B+';

--Senior secured credit facility 'BB+/RR1';

--Senior secured notes 'BB+/RR1'.

The Rating Outlook is Negative.