Coty Inc. Issuer Credit Rating Lowered To 'B', Placed On CreditWatch Negative Due To Impact Of The Spread Of COVID-19

  • The coronavirus outbreak has led to widespread retail store closures and a significant decline in travel. We believe Coty Inc.'s sales and profits will suffer near term because of the coronavirus outbreak.
  • Coty's leverage is high because of its poorly executed acquisition of the P&G Beauty business and structural headwinds in the mass beauty channel. Also, prior to the coronavirus outbreak significant near-term deleveraging was dependent on asset sales. The timing of the divestitures could be pushed out given the global economic downturn and the volatility of capital markets.
  • We lowered our issuer credit rating on Coty to 'B' from 'B+'. At the same time, we lowered our rating on the company's senior secured debt to 'B+' from 'BB-'. The recovery rating remains '2', indicating our expectation of substantial recovery (70%-90%; rounded estimate: 75%) in the event of a payment default. Subsidiary Coty B.V. is a co-borrower under the revolver. In our rating analysis, we view Coty Inc. and its operating subsidiaries as a group.
  • We also lowered the rating on the senior unsecured debt to 'B' from 'B+'. The recovery rating remains '4', indicating our expectation for average recovery (30%-50%; rounded estimate: 35%) in the event of a payment default.
  • The CreditWatch placement reflects the potential for a lower rating over the next few quarters if its business continues to be hurt by massive retail store closures and the economic fallout of the spread of the coronavirus.
NEW YORK (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the rating actions listed above. The rating action reflects our expectations that the massive retail store closings and decline in travel sparked by the coronavirus pandemic has had a significant impact on Coty's sales and profits. Coty announced it believes its sales will decline 20% in its fiscal third quarter (ending March 31). We expect its fiscal fourth-quarter financial results to also suffer given it is heavily dependent on developed markets and cases of COVID-19 continue to rise in these regions.
The CreditWatch placement with negative implications reflects further downside risk over the next few quarters if massive retail store closures extend beyond its fiscal fourth quarter (ending June 30). We will assess the effects on the company's credit metrics, covenant cushions, and liquidity.
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