Avon 2015 Annual Report Download - page 72

PART II
At December 31, 2015, we also had outstanding $250.0 principal amount of our 5.75% Notes due March 1, 2018 (the “2018 Notes”),
$250.0 principal amount of our 4.20% Notes due July 15, 2018 (the “4.20% Notes”) and $350.0 principal amount of our 6.50% Notes due
March 1, 2019 (the “2019 Notes”), with interest on each series of these Notes payable semi-annually.
The indentures governing our outstanding notes described above contain certain covenants, including limitations on the incurrence of liens
and restrictions on the incurrence of sale/leaseback transactions and transactions involving a merger, consolidation or sale of substantially all
of our assets. In addition, these indentures contain customary events of default and cross-default provisions. Further, we would be required
to make an offer to repurchase all of our outstanding notes described above, with the exception of our 4.20% Notes, at a price equal to
101% of their aggregate principal amount plus accrued and unpaid interest in the event of a change in control involving Avon and a
corresponding credit ratings downgrade to below investment grade.
Long-Term Credit Ratings
Our long-term credit ratings are Ba2 (Negative Outlook) for corporate family debt, and Ba3 (Negative Outlook) for senior unsecured debt,
with Moody’s; B+ (Stable Outlook) with S&P; and B+ (Negative Outlook) with Fitch, which are below investment grade. We do not believe
these long-term credit ratings will have a material impact on our near-term liquidity. However, any rating agency reviews could result in a
change in outlook or downgrade, which could further limit our access to new financing, particularly short-term financing, reduce our
flexibility with respect to working capital needs, affect the market price of some or all of our outstanding debt securities, and likely result in
an increase in financing costs, including interest expense under certain of our debt instruments, and less favorable covenants and financial
terms under our financing arrangements. For more information, see “Risk Factors – A general economic downturn, a recession globally or in
one or more of our geographic regions or markets or sudden disruption in business conditions or other challenges may adversely affect our
business, our access to liquidity and capital, and our credit ratings,” “Risk Factors – Our credit ratings were downgraded in 2015, which
could limit our access to financing, affect the market price of our financing and increase financing costs. A further downgrade in our credit
ratings may adversely affect our access to liquidity,” and “Risk Factors – Our indebtedness could adversely affect us by reducing our flexibility
to respond to changing business and economic conditions” included in Item 1A on pages 8 through 22 of our 2015 Annual Report.
Please also see Note 5, Debt and Other Financing on pages F-19 through F-21 of our 2015 Annual Report for more information relating to
our debt and the maturities thereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(U.S. dollars in millions, except per share data)
The overall objective of our financial risk management program is to reduce the potential negative effects from changes in foreign exchange
and interest rates arising from our business activities. We may reduce our exposure to fluctuations in cash flows associated with changes in
interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments and through
operational means. Since we may use foreign currency rate-sensitive instruments to hedge a portion of our existing and forecasted
transactions, we expect that any loss in value for the hedge instruments generally would be offset by changes in the value of the underlying
transactions.
We do not enter into derivative financial instruments for trading or speculative purposes, nor are we a party to leveraged derivatives. The
master agreements governing our derivative contracts generally contain standard provisions that could trigger early termination of the
contracts in some circumstances, including if we were to merge with another entity and the creditworthiness of the surviving entity were to
be “materially weaker” than that of Avon prior to the merger.
Interest Rate Risk
In the past we have used interest-rate swaps to manage our interest rate exposure. The interest-rate swaps were used to either convert our
fixed rate borrowing to a variable interest rate or to unwind an existing variable interest-rate swap on a fixed rate borrowing. As of
December 31, 2015, we do not have any interest-rate swap agreements. Approximately 2% and approximately 5% of our debt portfolio at
December 31, 2015 and 2014, respectively, was exposed to floating interest rates.
Our long-term borrowings were analyzed at year-end to determine their sensitivity to interest rate changes. Based on the outstanding balance
of all these financial instruments at December 31, 2015, a hypothetical 50-basis-point change (either an increase or a decrease) in interest
rates prevailing at that date, sustained for one year, would not represent a material potential change in fair value, earnings or cash flows. This
potential change was calculated based on discounted cash flow analyses using interest rates comparable to our current cost of debt.
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