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Global Credit Research - 17 Dec 2010
Baa2/Prime-2 - ratings affirmed
New York, December 17, 2010 -- Moody's Investors Service affirmed the Baa2 senior unsecured and the Prime-2
commercial paper ratings of Avery Dennison Corporation (Avery) and changed
the rating outlook to stable from negative. The move to a stable
outlook reflects Moody's belief that it is likely that Avery will be able
to generate stronger credit metrics in 2011 and 2012 than in 2010.
The benefits from an improving retail market, successful cost cutting
programs, improvements in working capital management, and
solid growth in developing countries should enable the company to report
increasing earnings despite the prospect of a slow recovery in the US
"The improved forecast reduces the risk that Avery's financial performance
will come under pressure as a result of weak market conditions,"
said Moody's analyst Bill Reed. "Additionally, the company
is benefiting from a number of past and ongoing proactive measures that
have generated cash, reduced debt and improved credit metrics to
levels that support the Baa2 rating.
- Senior unsecured guaranteed notes due 2017 -- Baa2
Avery Dennison Corporation
- Senior notes due 2020 -- Baa2
- Medium term notes -- Baa2
- Senior unsecured notes -- Baa2
- Commercial Paper of Prime-2
Avery's Baa2 ratings are supported by a relatively stable historic business
profile and the prospect for sustained improvement in credit metrics as
the global economy gradually recovers in the 2011-2012 time frame.
The Baa2 rating is further buoyed by management's efforts at reducing
absolute debt levels and instituting cost saving and restructuring programs
designed to improve and generate cash flow. We view both the final
exchange of the HiMEDS into equity and management's commitment to
debt reduction as distinct credit positives.
Avery's existing Baa2 ratings have a stable outlook as we expect that
the improvement in credit metrics will be sustained and that the negative
effects of combined pressure of raw material cost inflation and declining
sales volumes has been arrested. Balance sheet debt reduction has
exceeded our expectations in terms of magnitude and timing with debt moving
from $2.3 billion at the end of 2008 to about $1.4
billion at the end of 2010. On a balance sheet basis Avery was
leveraged, on an unadjusted basis, over three times going
into the recession, and is likely to approach under two times by
the end of this 2010. Nevertheless, the outlook also reflects
the understandable move on the part of management, having used free
cash flow to reduce leverage, to consider, perhaps sooner
rather than later, increasing the return of cash to shareholders.
Historically, Avery has always been a company that was a "dividend
raiser and a repurchaser" but halted repurchases post the Paxar
acquisition and prudently pared the dividend during the depths of the
downturn. Moody's expects that Avery, not being an acquisitive
high-growth company, in order to augment organic growth,
will increase dividend yields and share repurchases as they are important
in increasing total shareholder return. Management has stated publicly
a desire to achieve, over time, a 40% to 50%
payout ratio. However Moody's expects this to be achieved
in a step by step manner given management's desire to have a sustainable
dividend that would be able to withstand a double dip economic downturn.
Avery's Prime-2 commercial rating is supported by a good liquidity
profile with a reasonable debt maturity profile. Currently commercial
paper borrowings are below $400 million (at roughly $350
million outstanding), a threshold that we view as a very comfortable
level of commercial paper relative to Avery's long term $1 billion
credit facility that supports the commercial paper program and matures
in August of 2012. The company is currently comfortably in compliance
with its covenants as set out in its bank agreements. The credit
agreements contain minimum Interest Coverage Ratio (EBIT/Interest Expense)
and maximum Leverage Ratio (Debt/EBITDA) covenants and allows for the
add back of up to $155 million of restructuring charges.
An upgrade of the company's ratings is unlikely in the near term as current
credit metrics more comfortably support the Baa2 along with the view that
shareholder return actions may limit further credit metric improvement.
Still, the outlook and ratings could be pressured positively if
Avery's credit metrics were to improve such that retained cash flow to
debt were to approach 30% on a sustained basis and debt to EBITDA
were to be maintained much closer to 2X. If credit metrics weaken
over the next two years such that retained cash flow to adjusted debt
falls to 20% and adjusted debt to EBITDA drops to a range of 2.8X,
on a sustainable basis, negative pressure on Avery's ratings and
the outlook would result.
The last rating action occurred on April 8, 2010 when Moody's assigned
ratings of Baa2 to senior unsecured notes.
The principal methodology used in rating Avery was Moody's Global Chemical
Industry rating methodology, published in December 2009, which
is available at www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Avery Dennison Corporation, headquartered in Pasadena, California,
is the largest global producer of pressure-sensitive and printable
labels. Avery's business segments include Pressure-sensitive
Materials, Office and Consumer Products, and Retail Information
Services. The company reported sales of $6.4 billion
for the LTM period ended October 2, 2010.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's changes Avery Dennison's outlook to stable from negative
250 Greenwich Street
New York, NY 10007
No Related Data.
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