Fitch: Bondholder Protection Measures Differ in Avon's Unsecured Notes.
NEW YORK New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Avon Products Inc's (Avon) privately placed securities, which rank pari passu with other notes, contain terms, conditions and covenants that provide a slightly higher degree of protection than the existing notes, according to Fitch Ratings Fitch Ratings
An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. .
Fitch provides a more detailed analysis below on the differences in bondholder protection measures.
At Dec. 31, 2010 Avon had $3.136 billion in debt. This figure is $690 million higher than the prior year mainly due to funding the $650 million Silpada Designs, Inc. (Silpada) acquisition. Except for less than $100 million in leases, all of Avon's debt is unsecured. Long term senior unsecured notes of $2.225 billion and $535 million of three privately placed unsecured notes issued in November 2010 comprised the majority of Avon's $3.136 billion in debt. There was a $500 million 5.125% unsecured note maturity in January 2011 that has been refinanced.
The $535 million in privately placed notes have similar terms and conditions to the existing publicly placed debt. Additionally, as is customary for private placements, several covenants are similar to Avon's bank credit facility. As a result, the following features provide private placement holders with moderately better protection than public notes:
--A financial covenant requiring interest coverage of at least 4 times (x) is the same as the Bank Credit Agreement.
--The guarantee of Avon Capital Corporation (ACC See adaptive cruise control. ) 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 Dec. 31, 2010 Fitch estimates that debt at the subsidiary level may potentially be as high as $1.5 billion (excluding approximately $61 million in leases). Presently, the overwhelming majority of Avon's debt is issued by Avon Products, Inc. Limitation on subsidiary debt is a positive for all noteholders 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 Triggering Event
A certain milestone or event that a participant in a qualified plan must experience in order to be eligible to receive a distribution from a qualified plan. 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 Beneficial Owner
A person who enjoys the benefits of ownership even though title is in another name.
For example, when shares of a mutual fund are held by a custodian bank or when securities are held by a broker in street name, the true owner is the beneficial of more than 35% of the outstanding voting stock Voting stock
The shares in a corporation that entitle the shareholder to vote.
Stock for which the holder has the right to vote in the election of directors, in the appointment of auditors, or in other matters brought up at the 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 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.
Public Notes issued from 2003-2006:
Holders of these securities have the least relative protection. While there are terms and conditions such as limitation of liens to 20% of Consolidated Net Tangible Assets Net Tangible Assets
Calculated as the total assets of a company, minus any intangible assets such as goodwill, patents and trademarks, less all liabilities and the par value of preferred stock. Also known as "net asset value" or "book value". , etc., these notes do not have the change of control feature found in later notes (see below). Outstanding issuances totaling $375 million are comprised of:
--$125 million 4.625% notes due May 2013;
--$250 million 4.2% notes due July 2013.
Public Notes issued since 2007:
In addition to the existing terms and conditions found in the 2003-2006 vintage these notes also offered 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.
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:
--Long-term Issuer Default Rating (IDR IDR
In currencies, this is the abbreviation for the Indonesian Rupiah.
The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) at 'BBB+';
--Bank credit facilities, 'BBB+'
--Senior unsecured notes, 'BBB+'
--Short-term IDR at 'F2';
--Commercial paper program at 'F2'.
Avon Capital Corporation
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Commercial paper issuances by Avon Capital Corporation is fully guaranteed by Avon.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'Fitch Downgrades Avon's LT IDR to 'BBB+', Affirms ST IDR at 'F2; Outlook Negative' (Feb. 10, 2010);
--'2011 Outlook: Consumer Products' (Nov. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
2011 Outlook: Consumer Products
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