May 21, 2024 15:59 GMT
Coty (Secured; Ba2 Pos, BB+ Pos, BBB- Stable) Roadshow
CONSUMER CYCLICALS
€500m 3NC2 Snr Secured IPT 5%- Low 5%s, FV to follow, pricing tomorrow.
Coty has wasted no time issuing after its first IG rating from Fitch last week. Though its only refi here, co will need to continue gross paydowns to delever into its targets & achieve IG status. Takeaways from Roadshow below. Moody's and the key S&P stayed put this morning - as expected. S&P may give a pre-emptive upgrade into IG if results stay firm (headline growth & margin expansion) - latest we see it moving post sale of remaining Wella stake; scheduled by end of CY25.
Background on co (only for those new to name);
- 62% of sales in prestige (luxury) brands under which most in fragrances - it targets consumer spend range of $20 to $450 there. Remaining 28% in 'consumer beauty' most of that in cosmetics & targets mass brands in $5-20 range. Moody's noted today "concentration in fragrance and colour cosmetics" were 2 categories more exposed in downturns vs. "skincare and haircare" and pointed to Covid as evidence. Still it recognised strong performance in recent years.
- Geographically it is light in Asia (China 4%, and APAC 6%) while heavy in NA (31%) and WE (25%) - a positive for it in recent years but consensus has that turning into a headwind next year on a US led slowdown.
- Coty has a mix of ownership & long-term license agreements on brands under it. On licenses it notes 4yrs till first sizeable renewal and 12y avg. remaining duration for top 7 licenses. Raters echo that adding not a near-term risk.
On financials;
- Gross debt is $4b, cash on hand $260m, which on LTM 3Q EBITDA of $1.1b left it net 3.4x levered. Leverage targets are 2.5x by CY24 and 2x by CY25. Earnings growth won't do much in Q4 (3m ending June) but FY25 EBITDA growth (c+9%) will help.
- Still most of it will come from debt paydowns & most of that financed from the remaining 25.8% stake in retail hair business Wella, valued at $1.08b. Over the last few years it is the Wella stake disposal that has done the legworkm but earnings & margin growth along with FCF discipline/dividend cancellation has helped.
- Re. FCF, it was seasonally weak in Q3 and will reverse positive in Q4. FCF guidance is for $400m in FY24 (12m ending June) with "growth in FY25". Consensus has slower 6% headline growth in FY25 but stronger margin growth driving EBITDA to $1.2b and FCF to $535m. Moody's assumes no dividend restart till 2x/'25 target reached.
On debt ladder & early calls;
- €500m Snr Secured (ratings above) 3NC2 being issued. Its paying down the $323m unsecured $ line {AR859051 Corp} & revolver ($255m). The only remaining unsecured will be the €180m 26s {AR860154 Corp}, callable at par and likely next target. Outside of that it has secured lines in $ and € due in '26, both trading tad below par & both only par callable in a year. Regardless between the two it has a ~$1.4b wall in '26 - we think it will target these lines first despite the high cash px €28s that have callable structure starting in Sept 25s (not far from YTW pricing to then). Target 2x leverage by CY25 points to the 28 line being taken down, though still uncertain noting it is a net not gross target (can hold cash against it).
- Note security & guarantees will be terminated on proposed notes (in line with other secured in '28-30s) if notes receive IG ratings from 2 of 3 agencies.
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