Avon Products, Inc. terminated its $1 billion senior unsecured revolving credit facility on June 5, 2015, replacing it with a $400 million senior secured facility. Fitch Ratings had cited the company's declining liquidity as part of its rationale in the May 1, 2015 downgrade of the Issuer Default Rating to 'BB-' from 'BB'. Cash balances had been more than $1.1 billion from 2010 through 2013 and combined with the $1 billion revolver for a very healthy $2+ billion liquidity buffer. At March 31, 2015 the company's liquidity was $1.7 billion. It is now $1.1 billion on a pro forma basis. Cash of almost $670 million at the end of March 2015 is still strong and should carry the company through the near term given Fitch's expectation for modestly negative free cash flow.

The facility, with Avon International Operations, Inc. as borrower, has a limited recourse guarantee from Avon. Avon, the subsidiary guarantor and the borrower each provide assets to secure the revolver. The guarantee by Avon is capped at the value of the security it provides, hence the limited recourse. The security for the facility includes substantially all assets of the borrower and the subsidiary guarantor and certain assets of Avon, and excludes collateral to the extent it would trigger an obligation to secure Avon's unsecured notes.

Covenants in the new secured credit agreement are accommodative for a difficult 2015 but tighten thereafter. The leverage covenant starts at 4.5x beginning on June 30, 2013, widens to 5.95x at Dec. 31, 2015, then begins declining to 3.5x over time. Based on flat debt of $2.6 billion, EBITDA would have to decline more than 50% to $470 million in 2015 from $970 million in 2014 to prompt a covenant violation. This is not Fitch's expectation. The interest coverage ratio which is effective June 30, 2015 begins at 3.5x but loosens to 2x at Dec. 31, 2015 before increasing to 3.5x over time. Restricted payment limitations are in place at a maximum of $120 million after 2015. Additional restricted payment amounts depend on liquidity levels as well as leverage ratios.