Avon's CDS widens sharply on turnaround, legal cost fears

Reuters

By Melissa Mott

NEW YORK, Oct 31 (IFR) - The cost of insuring Avon Products debt against default rose to a three-month high onThursday after the company missed third quarter earningsexpectations and warned that it would likely cost more thanexpected to settle a bribery probe.

The cosmetic seller's five-year credit default swaps widenedby 53bp to 210.5bp, making it the worst performing constituentin the investment-grade CDX.IG21 index.

The company reported a 7% drop in third-quarter revenues toUSD2.3bn. Beauty sales, and fashion and home sales fell 9% and7% respectively, while core earnings per share were 14c comparedto consensus of 19c.

Its shares also fell sharply, hitting their lowest levelsince February, on concerns that the company's turnaround planwas not working.

"The third quarter was tough," Sheri McCoy, Chief ExecutiveOfficer of Avon Products, Inc said. "However, overall, Avon isheaded in the right direction, parts of our business arestabilizing, and we are making progress toward our three-yearfinancial goals."

Also weighing heavily on the company's CDS were fears overthe potential cost of a bribery probe.

The company said the size of a penalty that the USSecurities and Exchange Commission offered to settle the matterin September was "significantly greater" than Avon's offer topay USD12m, and would "materially adversely" hurt its financialcondition.

The Wall Street Journal has reported that the fine couldexceed USD100m.

"We have cash balances. And obviously, we also have arevolving credit facility that we have in place for backupliquidity needs," said McCoy.

The move in the company's CDS was more pronounced than thecash bonds.

That is probably because the issuer's bonds include languagewhich protects bondholders in the event of a downgrade to "junk"by all three major rating agencies.

This change of control language is a proviso which iftriggered by a ratings downgrade would require the company topurchase the instruments at 101.

This is a fear since S&P, which rates Avon at BBB-, has anegative outlook on the company.

Fitch downgraded Avon to speculative grade in February,cutting the company's rating by one notch to BB+, citing aconfluence of factors including a decline in US revenues, a lackof sustainable operating income growth in key internationalmarkets and weakened credit protection measures.

Moody's rate the issuer in investment-grade territory atBaa2.

Avon's 5.00% bond, due in 2023, fell to USD103.25 fromWednesday's USD104.00 close, while the 4.60%, due 2020, droppedto USD103.51 from USD105.94.

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