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Announcement:

Moody's changes Avery Dennison's outlook to stable from negative

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 and Europe.

"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.

Ratings affirmed

ADOP Company

- 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.

New York
William Reed
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
John Rogers
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes Avery Dennison's outlook to stable from negative
No Related Data.
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