Fitch assigns BBB+ rating to Clorox's US$600M 10-year senior unsecured notes; proceeds to be used to pay down outstanding commercial paper balances and to refinance US$350M 5.45% senior unsecured notes due in October
Nevin Barich
NEW YORK , September 10, 2012 (press release) – Fitch Ratings has assigned a 'BBB+' rating to The Clorox Company's (Clorox) $600 million 10-year senior unsecured notes that will be issued today. Proceeds will be used to pay down outstanding commercial paper balances and to refinance the $350 million 5.45% senior unsecured notes due in October 2012. At June 30, 2012, the company had $289 million in outstanding commercial paper. The notes will be issued under the fourth supplement to the October 2007 Indenture. They contain the customary provision of a change of control triggering event if approximately 50% of Clorox's ownership changes or substantially all of its assets are transferred and ratings fall below investment grade. If those conditions are met, the company must repurchase the notes at 101% plus accrued interest. Low Business Risk, Steady Leverage: Clorox's 'BBB+/F2' ratings and Stable Outlook are predicated on its low business risk, big-share brands in mid-sized categories, strong credit protection measures, and ample liquidity. Clorox's free cash flow remains healthy at $105 million in FY2012 but has declined from the more robust $300 million levels seen prior to FY2010 which was prior to the sale of its auto-care business. The auto-care business had a relatively modest impact on revenues at just $300 million in 2010. However, it had profit margins of 40% (before taxes) which would most likely have provided an outsized contribution to the company's free cash flow. Additionally, the timing of income tax payments this year had a negative impact on cash flow. Nonetheless, Clorox has adjusted its discretionary activities such that it will operate with leverage of 2x-2.5x and has done so since FY2009. The company ended this fiscal year with leverage at 2.46x. Fitch expects Clorox to balance any acquisition, divestiture or share repurchase program within its 2x-2.5x leverage target or have credible plans to return to within targets within a short timeframe. Slow-Growth Market with Moderate Commodity Pressure on Margins: More than 75% of Clorox's revenues are generated in the U.S. where it competes in mature slow-growth categories. Private label has a meaningful presence of more than 20% in key categories such as trash bags and food storage containers. Thus, absent acquisitions, Clorox's revenue growth has been in the low- to mid-single-digit range. Furthermore, commodities used in the manufacturing process such as resin can experience periods of price volatility, and pressure the company's profit margins. However, Clorox has a long and successful track record of cost savings, a very fast cash conversion cycle with little variability (30-32 days), and strong brand leadership which has allowed it pricing flexibility. Financial Performance: For FY2012, Clorox's revenues increased 4.5%, led by pricing/mix of 1.8%, volume momentum of 2%, .9% due to two small acquisitions (Applicare, Inc. and HealthLink, Inc.), with a slight .2% negative offset from foreign exchange translation. Gross margins decreased 80 basis points as cost savings and pricing were not enough to offset commodity costs, logistics and other costs. Commodity costs including resins and corrugates which escalated during the first half of the fiscal year have risen and are expected to rise more moderately going forward, which should benefit margins and profitability. Clorox's free cash flow (FCF) has been under $200 million in the past two years and was $105 million in FY2012. Fitch expects that although commodity costs have moderated, FCF is likely to show only modest improvement. The general slow-down in international markets and the strong promotional environment in the U.S. is likely to hamper FCF growth in 2013. Escalating commodity costs would be the key risk to Fitch's expectations. Liquidity: Clorox's considerable liquidity is derived from its $1.1 billion unused revolver which matures in May 2017, $267 million in cash at June 30, 2012, and access to the capital markets. The company has another large near-term debt maturity when a $500 million 5% note matures on March 1, 2013. Fitch expects that this note will be refinanced. Excluding the $350 million note that is expected to be refinanced with today's issuance and the $500 million note due in March, the remainder of Clorox's $2.4 billion in long-term debt matures after 2015. Rating Action Triggers: Positive: The company has the financial flexibility to manage its credit metrics at higher levels given stable cash flows. Operating with leverage of less than 2x and demonstrating a commitment to staying within that band while maintaining its current business momentum would support upward migration of Clorox's rating. Negative: A change in financial strategy to operate with higher leverage, or completing a large debt-financed share buyback or acquisition is likely to trigger a negative rating action. None of these actions is expected. Fitch currently rates Clorox's debt as follows: --Issuer Default Rating (IDR) at 'BBB+'; --Unsecured bank facility at 'BBB+'; --Senior unsecured Notes at 'BBB+'; --Short-term IDR and commercial paper program at 'F2'. The Rating Outlook is Stable.
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