Tuesday 21 November 2017 by Jonathan Sheridan Sales commentary

Avon close to the magic 7%

Part of how we add value at FIIG is finding bonds that look cheap and this one looks super cheap



The company

Avon Products Inc. (Avon) is a global manufacturer and marketer of beauty and non-beauty related products. The company conducts business in the highly competitive beauty industry and competes against other consumer packaged goods and direct selling companies. Avon mainly uses one channel where sales are made principally through direct selling by representatives to the ultimate consumer. The Avon brand ranks within the top five brands in the world in the beauty and personal care category and has 90% brand recognition in most major markets around the world. 

The bond

Avon offers a five year senior secured bond paying a 7.875% coupon that is rated BB-/Ba1 (S&P/Moody’s) with a recovery rating of 1 (denoting an expectation of ‘very high’, assigned by S&P). The issue was a good size at USD500m. Importantly it is the senior secured ranking that is attractive, driving the recovery rating to be between 90-100%, and investors don’t have to pay a large premium with the bond trading around USD103.40 for a current yield to worst of 6.82% to the par call date in 2021 and a 7.01% yield to maturity in 2022. 

Issuer Type Maturity date Yield to maturity  Yield to worst  Running yield Minimum parcel
Avon Products Inc. Fixed 15 August 2022 7.01% 6.82% 7.62% USD10,000

Prices accurate as at 21 November 2017 but are subject to change

Source: FIIG Securities, Bloomberg
Figure 1

Why it looks compelling

First of all, the company is showing great financials compared to the others listed in the High Yield Index. Goldman Sachs cited that at that senior secured level Avon has 1.1x gross leverage and actually negative 0.4 net leverage based on the company’s current holding of USD660m cash. So at the secured level, Avon is actually net debt positive. Ignoring the fact that they have a fair amount of other, subordinated debt, the bond is yielding close to the magic 7% and maturing in just under five years.

Compared to the rest of the USD high yield space, and just looking at the financials and yield ratings alone, the Avon 2022 bond is a no brainer.

What is interesting is Goldman Sachs’ commenting that the bond was poorly marketed. The High Yield Index is trading at 5.4%, yet you have the Avon 2022 trading at nearly 2% wider than the index, it seems that call could be correct. The positive financial metrics and the additional margin seems to indicate Avon is a massive outlier. It’s also a great diversifier in portfolios with Australian bond investors’ portfolios overweight in banks, financials and resources – a beauty product company, at a USD10,000 minimum, is something that should be in every USD portfolio.

If you think we are heading towards the end of the cycle, then particularly in the high yield space, you should be looking for secured exposures as much as possible and Avon ticks this box.

Of course with a yield this high, nothing is perfect. The main issue is our external credit researcher citing that the company has reported a weak quarter with weak representative growth coupled with continued bad debt expense in Avon’s biggest and most important market, Brazil. Declining representative growth refers to the number of people who actually do the direct selling in Brazil. In saying that, management may change next March with a prospective new CEO, and we would expect the company to post better profit numbers going forward and further decrease leverage.

There are some strong indicators for why you should consider a place for the Avon 2022 bond in your portfolio.

Note this bond is available to wholesale clients only. For more information, please call your local Relationship Manager.

Note: The above article was not written by the FIIG Research team. Additionally, FIIG Research does not assess these companies. We are assisted by independent third party research, to increase the number of bonds we make available. Companies and bonds need to meet certain qualifications before we issue them in small parcels. For more information please see the new DirectBond process for non Australian dollar high yield bonds.External link - opens in a new window