Coty Inc. Rating Affirmed On Planned Recapi New Debt Ratings Assigned

Stocks and Financial Services Press Releases Tuesday March 20, 2018 09:33
NEW YORK--20 Mar--S&P Global Ratings
NEW YORK (S&P Global Ratings) March 19, 2018--S&P Global Ratings today affirmed its 'BB' corporate credit rating on Coty Inc. The outlook is stable.

At the same time, we assigned 'BB+' issue-level ratings to the company's proposed $9.0 billion senior secured credit facilities, consisting of a $3.0 billion revolver due 2023, a $1.25 billion term loan A due 2023, an Euro term loan A equivalent to $2.25 billion due 2023, a $1 billion term loan B due 2025, and an Euro term loan B equivalent to $1.5 billion due 2025. The '2' recovery rating indicates our expectation of substantial recovery (70%-90% rounded estimate 75%) in the event of a payment default. Coty B.V., a subsidiary of Coty Inc., is a co-borrower of the revolver. For purposes of the ratings, we view Coty Inc. and its operating subsidiaries as a group. All ratings are based on preliminary terms and are subject to review of final documents.

The company plans to use proceeds from the debt offering to repay a portion of its existing debt, including debt that resides at Galleria Co.
The company will have $8.0 billion of funded debt at the close of the transaction.

The affirmation reflects our expectation that Coty will improve its operating performance, although progress could be uneven, resulting in stronger credit metrics and increases in free cash flow. The affirmation also reflects our view that the recapitilization will be leverage-neutral.

The stable outlook on Coty reflects our expectation that management will stabilize the performance of the consumer beauty segment and grow the acquired P&G beauty assets. In addition, we expect the company to realize greater efficiencies from the former P&G brands, and achieve cost reductions in its fiscal 2018. We forecast adjusted leverage will decline to the low-5.0x area by year-end fiscal 2018 from the mid-5.0x area at year-end fiscal 2017 and below 5.0x in fiscal 2019. We could raise our rating on Coty if it gains traction in rebuilding the P&G brands, stems its decline in market share, maintains its strong market position in the beauty category, and improves its profitability such that its EBITDA margin expands to 20% or above, resulting in it being able to sustain adjusted leverage below 4.0x. We believe this is unlikely over the next year given its current level of operating performance.

We could lower our rating on Coty if it continues to encounter difficulty in repositioning its consumer beauty business, resulting in the company not being able to expand its EBITDA margin and reduce leverage. If this were to occur, we could reconsider the business risk. We could also lower the rating if the company's financial policy becomes more aggressive such that it makes additional debt-financed acquisitions and sustains adjusted leverage above 5.0x.


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