Ratings agency warns on Avon Products’ debt levels

By Simon Pitman

- Last updated on GMT

Ratings agency warns on Avon Products’ debt levels

Related tags Debt

Years of poor performance have taken a big toll on Avon Products' balance sheet, with credit ratings agency Fitch Solutions now warning that the cost of protecting the business from defaulting on debt payments is at a record high.

According to Fitch analysts, the company’s five-year credit-default swaps on its debt have widened by 22% in the last month, a record high that indicates the company’s financial position is continuing to weaken, with increasingly less room for maneuvering .

The longer-term picture on the credit-default swaps tells a similar story, with the figure widening by 130% since the start of the year, the credit agency also points out.

Fitch says Avon's situation is 'adequate'

Although Fitch analysts described Avon’s situation with respect to the swaps as being “adequate in the near term” due to sufficient cash liquidity, investors seemed more concerned by the note, which led to another dip in share prices.

The news resulted in Avon’s share price reaching a new record low of $2.50 per share on Friday, down from $3.22 at the beginning of the week, and $10.26 this time one year ago.

Earlier this month Fitch downgraded Avon’s rating from B+ from BB-, a rating that puts it well below investment grade. And with the outlook as negative, there is a likelihood that the current rating could further deteriorate.

Avon struggles against global economic challenges

For the most recent quarterly results, the company found itself struggling against currency headwinds and tax hikes in the massive Brazil market, where it has a lot of exposure.

The company reported that net sales during its third quarter were down 22% to $1.7bn, which translated into a 2% decline in constant dollars, underling a massive hit from currency translations that totalled 20%.

The big sales decline also impacted net profits significantly, which were down from a small profit of $92m in the corresponding period last year, to reach a loss of $697m for the quarter.

Looking ahead to the full financial year 2015, the company says that its constant-dollar revenue is set to be in line with forecasts, while the impact of foreign currency translations is expected to negatively impact the results by 19%.

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