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Rating Action: Moody's assigns B3 rating to Coty's proposed 1st lien notes; changes outlook to stable; affirms Caa1 CFRGlobal Credit Research - 15 Apr 2021New York, April 15, 2021 -- Moody's Investors Service, ("Moody's") today assigned a B3 rating to Coty Inc.'s ("Coty") proposed $750 million senior first lien secured 5-year notes due 2026. Concurrently, Moody's changed Coty's rating outlook to stable from negative, and affirmed the company's Corporate Family Rating ("CFR") at Caa1 and its Probability of Default Rating at Caa1-PD. Moody's also affirmed Coty's senior secured credit facility ratings including the company's first lien revolving credit facility at B3 and its first lien term loan at B3, and also affirmed Coty's Caa3 senior unsecured notes rating. Coty's SGL-4 Speculative Grade Liquidity Rating remains unchanged.Proceeds from the new offering will be used to repay a portion of the company's $1.9 billion outstanding term loan A due 2023 and pay $13 million of fee and expenses.The rating outlook was changed to stable from negative because Moody's expects that Coty will continue to improve credit metrics over the next 12-to-18 months through an ongoing recovery in earnings from the weakness experienced during the coronavirus downturn. Coty has made good progress in reducing financial leverage, and Moody's estimates that debt-to-EBITDA leverage will improve to about 8.5x in December 2021 from over 15.0x during the twelve months ending December 31, 2020. Improved leverage reflects meaningful debt repayment from proceeds following the divestiture of a 60% interest in its Wella assets, continued cost reduction initiatives and efficiency improvements. The company estimates that 3rd quarter sales, ending March 31, 2021, will be down by low single digits, which represents meaningful sequential improvement from revenues that were down by mid to high double digits during the March, June and September quarters of 2020. The outlook change also reflects that the proposed offering is credit positive because it demonstrates continued progress with extending the significant 2023 debt maturities.Moody's nevertheless affirmed Coty's Caa1 CFR because the company faces high execution risk to meaningfully and sustainably improve EBITDA and operating cash flow, which in part includes the continued refocus of its Consumer Beauty business product mix away from low-value sales. Stronger earnings performance is necessary to reduce leverage, improve reinvestment capacity in the highly competitive beauty industry, and provide more flexibility to address the still significant 2023 maturities. Leverage is also unaffected by the refinancing.New Assignments:..Issuer: Coty Inc.....GTD Senior Secured Global Notes, Assigned B3 (LGD3)Ratings Affirmed:..Issuer: Coty Inc..... Corporate Family Rating, Affirmed Caa1.... Probability of Default Rating, Affirmed Caa1-PD....GTD Senior Secured 1st Lien Term Loan, Affirmed B3 (LGD3)....GTD Senior Secured 1st Lien Revolving Credit Facility, Affirmed B3 (LGD3)....GTD Senior Unsecured Global Notes, Affirmed Caa3 (LGD5)Outlook Actions:..Issuer: Coty Inc.....Outlook, Changed To Stable From NegativeRATINGS RATIONALECoty's Caa1 CFR reflects the company's gradual recovery from weak revenue levels over the next few quarters driven by efforts to contain the coronavirus and pressure on discretionary consumer income, contributing to high debt to EBITDA financial leverage that Moody's estimates at about 8.5x in December 2021. The rating also reflects Moody's belief that the company will generate weak free cash flow over the next several quarters due to its ongoing restructuring costs. Coty has been plagued by low demand for its products due to weaker than expected sales and earnings from its consumer beauty products (38% of sales) and from the company's luxury beauty and fragrance products (62% of sales). Over the next 3-6 months, demand will continue to be adversely impacted by the lingering effects of the coronavirus as worldwide consumer vaccination efforts remain uneven, as well as ongoing competitive pressures. That said Moody's expects demand for the company's products to improve over the next year as the number of vaccinated consumers continues to increase, and as consumers slowly return to their everyday activities.Coty's concentration in fragrance and color cosmetics creates exposure to discretionary consumer spending and requires continuous product and brand investment to minimize revenue volatility as these categories tend to be more fashion driven than other beauty products. Coty will remain more concentrated than its primary competitors in mature developed markets. This creates growth challenges and investment needs to more fully build its global distribution capabilities and brand presence. The ratings are supported by the company's large scale, its portfolio of well-recognized brands, and good product and geographic diversification.The SGL-4 Speculative Grade Liquidity Rating reflects Moody's view that Coty's liquidity is weak. Coty's ongoing restructuring actions will consume large amounts of cash and Moody's expects the company to generate negative free cash flow in fiscal 2021. Free cash flow should turn positive in fiscal 2022 but required debt amortization remains significant at about $200 million annually. The $2.75 billion revolver expiring in 2023 is subject to a maximum total net leverage financial covenant with step downs. The covenant's next step down to 5.0x is in March 2022. Moody's projects that the company will have weak headroom under the total net leverage covenant over the next 12 months.ENVIRONMENTAL SOCIAL AND GOVERNANCE CONSIDERATIONSThe coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of consumer sectors from the current weak U.S. economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around Moody's forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.Coty's ratings also reflect governance considerations related to its financial policies and board independence. Moody's views Coty's financial policies as aggressive given its appetite for debt financed acquisitions. In addition, the company's board of directors has limited independence given that four of the nine board members are related to JAB, Coty's majority shareholder.Social considerations impact Coty in several ways. First, Coty is a "beauty" company. It sells products that appeal to customers almost entirely due to "social" considerations. That is, such products such as makeup and fragrance help individuals fit in to society and comply with social mores and customs. Hence social factors are the primary driver of Coty's sales, and hence the primary reason it exists. To the extent such social customs and mores change, it could have an impact -- positive or negative -- on the company's sales and earnings. However, Moody's believes such risk is manageable as such customs and mores change at a measured pace, and as the company is able to adapt to changing "fashion" trends, and hence offset such social changes. The company engages with social media influencers, which is in line with demographic and societal trends. While negative product reviews for the company have historically been modest, Moody's recognizes that a high number of adverse product reviews could negatively impact product demand.To help support the coronavirus relief effort, Coty adapted many of its factory operations to produce hydro-alcoholic gel, which the company distributed for free to medical and emergency services staff, care homes and pharmacies, as well as to Coty associates. The company also diverted resources, such as alcohol wipes and protective gloves, from a number of their brands for distribution.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSCoty's ratings could be downgraded if Coty is unable to successfully refinance its remaining debt due 2023 in a timely manner. Ratings could also be downgraded if the company fails to stabilize revenue and earnings or continues to generate weak or negative free cash flow over the next 12-18 months. The inability to further reduce financial leverage and improve liquidity, or the pursuit of material debt funded acquisitions or shareholder returns could also lead to a downgrade.Coty's ratings could be upgraded if the company successfully refinances its remaining debt due 2023 in a timely manner and meaningfully reduces financial leverage. Coty would also need to consistently generate renewed revenue and earnings growth such that comfortably positive free cash flow is restored.The principal methodology used in these ratings was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Coty Inc. ("Coty"), a public company headquartered in New York, NY, is one of the leading manufacturers and marketers of fragrance, color cosmetics, and skin and body care products. The company's products are sold in over 150 countries. The company generates roughly $4.0 billion in annual revenues. Coty is 60% owned by a German based investment firm, JAB Holding Company S.a.r.l. (JAB), with the rest publicly traded.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Chedly Louis VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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