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Fitch: Bondholder Protection Measures Differ in Avon's Unsecured Notes.

NEW YORK -- 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 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) 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 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 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, 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:

Avon

--Long-term Issuer Default Rating (IDR) 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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

2011 Outlook: Consumer Products

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=574606

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
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Publication:Business Wire
Geographic Code:1U2NY
Date:Feb 11, 2011
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