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Investing.com -- Moody’s (NYSE:MCO) Ratings announced today that it has upgraded the Corporate Family Rating (CFR) of Coty Inc (NYSE:COTY). to Ba1 from Ba2. Additionally, Coty’s Probability of Default Rating, senior secured first lien revolving credit facility rating, senior secured notes ratings, and the senior unsecured notes ratings have all been raised to Ba1 from Ba2. However, the agency has lowered Coty’s speculative grade liquidity rating to SGL-2 from SGL-1. The rating outlook remains stable.
The upgrades are a result of Coty’s successful efforts in reducing financial leverage and strengthening its balance sheet, as well as maintaining robust liquidity. This has been primarily achieved through debt repayment funded from free cash flow and asset sales. The agency anticipates that Coty’s debt-to-EBITDA leverage will improve to a low 3x range by December 2025, supported by modest revenue and earnings growth as well as debt repayment.
Coty’s commitment to continue de-leveraging has been a significant factor in the upgrade. The company aims to reduce net debt-to-EBITDA to 2.0x by the end of 2025 from 2.9x as of December 2024. Over the past four years, Coty has successfully transformed its business, generating healthy growth in both its prestige and mass portfolios. The company has also achieved higher gross margins by focusing on product premiumization and innovation, brand repositioning, and investment in marketing and brand support.
Coty has witnessed solid growth in its prestige segment and the fragrance category. Moody’s expects the company to continue improving revenue and earnings in the next 12-18 months, albeit at a more modest pace due to softness in the consumer beauty segment and foreign exchange headwinds. The company is projected to generate at least $250 million of free cash flow annually, supported by modest earnings growth, disciplined capital spending, working capital management, and further cost-saving initiatives.
Moody’s lowered Coty’s speculative grade liquidity rating due to the remaining $1.1 billion senior secured notes maturities due in April 2026. It is anticipated that Coty will need to significantly utilize its approximate $2 billion of committed revolver to fund the maturities if it does not proactively refinance the notes.
Coty’s Ba1 CFR reflects the company’s solid market position and improved operating performance, leading to sizable annual free cash flow, and the company’s commitment to delever. The rating also takes into account that Coty’s earnings growth is supported by an expansion in travel retail, healthy demand and higher penetration in prestige fragrance, product premiumization, and innovation.
The stable outlook reflects Moody’s expectation that Coty will continue to generate good earnings and use free cash flow and proceeds from asset sales to repay debt and reduce debt-to-EBITDA leverage. The outlook also anticipates that the company will only resume dividend payments after the company meets its mid to long-term target leverage ratio of 2.0x and maintains at least good liquidity.
The ratings could be downgraded if Coty’s operating performance deteriorates due to market share losses, revenue declines or an inability to increase prices to cover costs. Conversely, the ratings could be upgraded if the company sustains strong operating performance with organic revenue growth, maintains its EBITDA margin, and increases revenue diversity.
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