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JC Penney High Yield Debt Plunges into Distressed Territory

J.C. Penney 8.625% second-lien secured bonds due March 2025—which priced at par just five months ago—slid some 10 points in trading Thursday, marking their inaugural descent into distressed territory at 73.5, trade data show.

The move follows the release of a substantially narrower-than-expected bottom line for the struggling department-store operator, as second quarter adjusted EBITDA of $105 million clocked in 45.5% below Street forecasts, based on consensus data compiled by S&P Global Market Intelligence.

Meanwhile, J.C. Penney’s 5.875% secured notes due July 2023 were off as much as 4.75 points in Thursday trading, declining to all-time lows of 89.75, before settling in midafternoon trading to 90.75 The secured tranche was placed in June 2016 at par, as part of a $500 million print backing the pay-down of real-estate term debt.

The issuer’s B term loan due 2023 (L+ 425, 1% LIBOR floor) was quoted in a 92.375/94.125 context in morning trading, down from 95/95.875 yesterday, according to market sources.

Management also slashed the company’s full-year EPS guidance to a loss per share of $0.80 to $1, from a prior forecast of a $0.07 loss to a $0.13 gain previously—sending shares to new sub-$2 lows. Sources highlighted that the company seems to be pursuing “buying and chasing” as it looks to take substantial markdowns to balance its inventory.

J.C. Penney’s secured bonds had previously declined in May, following mixed first-quarter results and the resignation of its then-CEO Marvin Ellison, who announced plans to pursue opportunities with Lowe’s Companies.

J.C. Penney is a Plano, Tex.–based operator of more than 1,000 department stores across the U.S. — James Passeri/Tyler Udland

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Diebold Debt Dives Deeper into Distressed on S&P Downgrade

diebold logoBonds backing Diebold Nixdorf tumbled another 12.5 points today, falling deeper into distressed territory at 57.5, trade data show, after the issuer was tagged with a two-notch S&P Global Ratings downgrade after the closing bell yesterday. The notes have now slid 34.5 points so far this month, from closing July levels around 92, and are down about 21.25 points week-over-week, according to MarketAxess.

Meanwhile, the issuer’s dollar B term loan due November 2023 (L+275, 0% LIBOR floor) was quoted at 84.625/86.25 on Thursday, indicating a week-over-week decline of roughly 10 points, sources said. The issuer’s euro-denominated B term loan (E+300, 0% LIBOR floor) was quoted at 83.625/85.75, from a Monday context of about 96.5. Both term loans were placed in April 2017, totaling $475 million and  €415 million respectively, with proceeds backing Diebold’s acquisition of Wincor Nixdorf.

After flagging covenant concerns on the issuer’s quarterly earnings release last week, creditors were again jolted by Monday’s filing of Diebold’s 10-Q with the SEC, which revealed that Diebold Nixdorf shareholders earlier this month requested redemption of roughly 2.4 million shares with a value of about $160 million. The company expects to use balance-sheet cash and borrowings under its revolving facility to fund the obligations, according to the filing. Diebold reported total cash of roughly $299 million at the end of the quarter. The filing also cautioned that the borrower is at risk of violating certain maintenance covenants governing its credit agreement as soon as this quarter.

S&P Global on Wednesday lowered the issuer’s corporate rating to B, from BB–, with a negative outlook, from stable previously, citing leverage concerns and the company’s ongoing efforts to amend is credit facility to avoid a maximum net leverage covenant violation. The ratings agency also cut Diebold’s secured and unsecured debt ratings to B and B–, respectively, from BB– and B+.

“Further weakening its near-term performance is the company’s newly announced DN Now multi-year business improvement and savings plan (which requires high costs in 2018), which comes after previous unsuccessful tries and at a time when the company is operating at its lowest liquidity level since the transformative acquisition of Wincor Nixdorf AG in 2016,” according to the Wednesday report.

Moody’s on Tuesday downgraded the issuer’s corporate rating by two notches, to B3, from B1, and revised its outlook to negative, from stable. The agency also cut its ratings on the company’s first-lien credit facilities to B3, from B1, as well as those on Diebold’s senior unsecured notes to Caa2, from B3.

Moody’s said the moves were driven by Diebold’s recent weaker-than-expected operating performance, meaningfully diminished liquidity, and the agency’s expectation that the company will face continued operating challenges in the coming year.

Diebold Nixdorf (NYSE: DBD) provides commerce services, software, and technology. — James Passeri/Mairin Burns

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Netflix Eyes High Yield Mart as Bonds Fall Amid Lackluster Subscriber Growth

Bonds backing Netflix (Nasdaq: NFLX) fell late yesterday, alongside a sharp decline in shares of the streaming media giant, after the company reported second-quarter subscriber growth of 5.2 million users—or one million viewers shy of its guidance of 6.2 million.

Revenue for the period of $3.907 billion was 0.8% below analyst forecasts based on consensus data compiled by S&P Global Market Intelligence, while adjusted EBITDA of $563 million topped consensus expectations by 2.6%.

The company’s 5.875% bullet notes due November 2028 and 5.875% notes due February 2025 were off 1.625 points and one point, respectively, after today’s closing bell, changing hands on either side of 100.25 and at 102, according to MarketAxess.

Netflix placed a $1.9 billion offering of the 5.875% notes due November 2028 in April at T+291 via a Morgan Stanley–led bookrunner group. The issue’s spread indications after the bell today were on either side of T+300, or roughly 25 bps wider month to month.

The company also said it is again eyeing the high-yield mart for a new round of capital raising.

“While interest rates have risen and the federal tax rate is now lower (reducing the tax shield on interest costs), we judge that our after-tax cost of debt continues to be lower than our cost of equity, so we anticipate that we’ll continue to finance our capital needs in the high-yield market,” the company said in today’s statement.

Netflix’s streaming revenue in the second quarter climbed 43% from the previous year, driven by a 26% increase in average paid memberships and a 14% rise in average selling price. The company said its operating margin of 11.8% widened 720 bps year-over-year, contributing to a 262% growth in operating income in the period.

“We had a strong but not stellar Q2, ending with 130 million memberships,” Netflix said, adding “in some quarters we will be high and other quarters low relative to our guidance. This Q2, we over-forecasted global net additions which amounted to 5.2m vs. a forecast of 6.2m and flat compared to Q2 a year ago, as acquisition growth was slightly lower than we projected.”

Netflix is a Los Gatos, Calif.–based global streaming media provider. — James Passeri/Jakema Lewis

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Tesla High Yield Debt Slides on 1Q Update, and as Musk Dodges Model 3 Questions

Tesla’s debut bonds fell this morning after the company released mixed first-quarter results after the closing bell yesterday. CEO Elon Musk, on the post-earnings call with analysts late yesterday, also raised eyebrows with his evasion of analyst inquiries into developments surrounding the electric car manufacturer’s critical Model 3 sedan.

The 5.3% notes due 2025 were changing hands as low as 87 today, indicating a roughly 2.25-point decline on the day, according to MarketAxess. The notes priced at par in August 2017 and plumbed lows of 86 in early April following a March 27 ratings cut by Moody’s, which at that time also lowered the issuer’s outlook to negative, from stable, citing negative free cash flow, liquidity pressures, and a “significant shortfall in the production rate of the company’s Model 3 electric vehicle.”

Tesla now says it will become cash flow positive in the second half of 2018 as the company ramps up production and deliveries of the Model 3 sedan, which the issuer said yesterday is “already on the cusp of becoming the best-selling mid-sized premium sedan in the U.S.”

Bruce Clark, lead auto analyst and Moody’s senior vice president, said today that Tesla “showed important progress by sustaining Model 3 weekly production above 2,000 units for three consecutive weeks.”

“Nevertheless, the company remains in an intense ‘learn-as-they-go’ process while attempting to reach production efficiencies necessary for a Model 3 production rate of 5,000 per week, a Model 3 gross margin of 25% and breakeven cash flow,” Clark added. “We continue to expect that Tesla will need to raise new capital approximating $2 billion—in the form of equity, convertible notes, or debt—in order cover a cash burn during 2018, and to refund a total of $1.3 billion of convertible debt that matures in late 2018 and early 2019.”

On yesterday’s conference call with analysts, discussing the subject of Model 3 reservations and capital requirements, Musk proved evasive, declining to answer and making the statements: “These questions are so dry,” “they’re killing me,” and “Boring questions are not cool. Next.”

Musk also said on the call that he is “quite confident about achieving GAAP net income and positive cash flow in 3Q,” highlighting that Model 3 gross margins should approach a range of about 20% by the end of 2018, as part of a steady trajectory toward a 25% target.

Tesla said first-quarter revenue totaled $3.4 billion, topping analyst expectations by roughly 3.3%, based on consensus data compiled by S&P Global Market Intelligence. The company booked a pretax loss of roughly $779 million for the quarter, slightly wider than the consensus estimate of $764 million.

Tesla also reduced its expectations for 2018 capital expenditures to less than $3 billion, from guidance of more than $3.4 billion previously. “Ultimately, our capex guidance will develop in line with Model 3 production and profitability,” the company said. “We will be able to adjust our capital expenditures significantly depending on our operating cash generation.”

On the liquidity front, Tesla reported $2.7 billion in cash at the end of March, down $700 million from a $3.4 billion cash balance at the end of 2017.

Tesla bonds have been pressured over the past several months as adjusted EBITDA and free cash flow for the past two quarters fell shy of analyst estimates. The company placed its debut 2025 offering in August to bolster its balance sheet and for general corporate purposes ahead of the launch of the Model 3, its first electric car designed for the mass market. The $1.8 billion tranche size was upsized from $1.5 billion.

Corporate and bond ratings are B–/B3 and B–/Caa1, respectively, with negative outlooks by S&P Global Ratings and Moody’s, and 3 recovery rating on the unsecured notes by S&P Global.

Tesla is a Palo Alto, Calif.–based manufacturer of electric vehicles as well as energy storage and solar products. — James Passeri/Jakema Lewis

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Tesla Bonds Plumb New Lows on Moody’s Downgrade

Tesla’s debut 5.3% notes due 2025, which priced at par last August, again slid to new lows this morning, falling two points on the day, to 87, according to MarketAxess. The latest move lower follows a Tuesday ratings cut by Moody’s, alongside an outlook revision to negative, from stable.

The ratings agency lowered the electric-car manufacturer’s corporate and unsecured note ratings to B3 and Caa1, respectively, from B2 and B3, citing a “significant shortfall in the production rate of the company’s Model 3 electric vehicle.”

“The company also faces liquidity pressures due to its large negative free cash flow and the pending maturities of convertible bonds ($230 million in November 2018 and $920 million in March 2019),” Moody’s added in a Tuesday report. “Tesla produced only 2,425 Model 3s during the fourth quarter of 2017; it is currently targeting a weekly production rate of 2,500 by the end of March, and 5,000 per week by the end of June. This compares with the company’s year-earlier production expectations of 5,000 per week by the end of 2017 and 10,000 by the end of 2018.”

Tesla bonds have been pressured over the last several months by lackluster earnings and concerns surrounding the issuer’s ability to meet Model 3 production targets, and most recently by reports this week of mounting short positions across the issuer’s capital structure and a Tuesday tweet by the National Transportation Safety Board that the agency is investigating the fatal March 23 crash of a Tesla Model X near Mountain View, Calif.

The 5.3% notes due 2025 have now fallen as much as 5.75 points week over week, and 7.5 points from the start of the month.

Tesla said in a Tuesday blog post that the company does “not yet know what happened in the moments leading up to the accident” and that Tesla “does not have any idea what caused it,” adding the company has been unable to retrieve the vehicle’s logs due to extensive damage caused by the collision.

Short positions against Tesla’s debut unsecured notes climbed past $280 million in November, per IHS Markit, before a spate of covering in December that drove prices to roughly 96.5. IHS Markit noted, however, that the remaining par value of roughly $251 million short this week accounts for more than 13% of the total issue amount.

In terms of quarterly shortfalls, Tesla’s adjusted EBITDA for the quarter ended Dec. 31 was reported at roughly $33.76 million, down 63.1% from analyst expectations, based on consensus data compiled by S&P Global Market Intelligence. Meanwhile, Tesla notes were also pressured in November on the rollout of third-quarter results, which indicated a downturn in free cash flow alongside an unexpected EBITDA loss.

Tesla placed its debut 2025 offering in August to bolster the company’s balance sheet and for general corporate purposes ahead of the launch of Tesla’s Model 3, its first electric car designed for the mass market. The $1.8 billion tranche size reflected an upsizing from first thoughts at $1.5 billion.

Corporate and bond ratings are B–/B3 and B–/Caa1, respectively, with stable outlooks by S&P Global Ratings and Moody’s, and 3 recovery rating on the unsecured notes by S&P Global.

Tesla is a Palo Alto–based manufacturer of electric vehicles as well as energy storage and solar products. — James Passeri

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Neiman Marcus Debt Rallies as Financial Results Top Expectations

Debt backing Neiman Marcus Group shot up today after the company posted financial results that bested analyst expectations due to better sales at its stores that it partly attributed to increased tourism and the oil patch recovery.

The issuer’s term loan due October 2020 (L+325, 1% LIBOR floor) was bracketing 90 this morning, up roughly two-to-three points since yesterday, sources said.

With the company remaining vague on its intentions to pay its interest in kind past the April 15 coupon date, the Neiman Marcus $628 million issue of 8.75%/9.50% senior PIK toggle notes due 2021 rallied more than eight points to a 14-month high of 68.75.

In an effort to preserve liquidity, the company previously elected to pay interest for the period to Oct. 14 in the form of more debt.

The company’s $960 million issue of 8% cash-pay notes due 2021 gained as much as 5 points, to 69.

The retailer today reported $1.48 billion in sales for its fiscal second quarter ended Jan. 27. The performance was up 6.2% from the year-ago equivalent period and above the $1.47 billion estimate cited in a note from Citi analyst Jenna Giannelli. Adjusted EBITDA for the quarter came in at $155 million, ahead of Citi’s $144 million projection and up roughly 22% from the same period last year.

Company executives in a conference call this morning cited improvements in the oil patch, which contributed to better operating results at its Texas stores, and increased tourism to its locations during the holiday season as some of the reasons behind the solid numbers.

On the call today, CEO Geoffroy van Raemdonck said the company has now recorded two straight quarters of sales increases for the first time since fiscal 2015, and that its online business now accounts for more than 34% of total revenue.

Also on the call, Chief Accounting Officer T. Dale Stapleton addressed the company’s liquidity position.

“I think we’re extremely comfortable with our liquidity providing us with sufficient funds to fund our operations as well [as] strategic initiatives,” Stapleton said, according to a transcript from S&P Global Market Intelligence. “So I think that’s one critical point. I think the second critical point is that with the maturity ladder of our debt, we don’t see the first maturities until October of 2020. And so given where we sit today, we believe that we have sufficient kind of runway to kind of think about our debt, our capital structure in a very thoughtful, deliberative and prudent way. Throughout kind of the downturn, I think we have been very active in managing our liquidity, and we will be active and proactive in managing through kind of our capital structure.”

Current CEO van Raemdonck joined the company earlier this year after Karen Katz stepped down from her post.

Corporate ratings are CCC/Caa2. — Kelsey Butler/Rachelle Kakouris

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Rite Aid, Albertsons Bonds Jump On Merger Announcement

Debt backing Rite Aid (NYSE: RAD) jumped following news that Albertsons has agreed to acquire the drugstore chain in a bid to create a food and wellness giant.

Rite Aid was the morning’s most actively traded name in high yield. Its 6.125% notes due 2023 were up seven points on the day, to 100.25, according to MarketAxess.

 

Meanwhile Albertsons 6.625% notes due 2024 were also changing hands at a steady clip, tacking on a point, to 96.

Over in loans, Albertsons B-5 term loan was bracketing 99 this morning, while its B-6 term loan was at 98.5/98.875, both off about a quarter point from Friday’s session, sources said. The issuer’s B-4 term loan was at a 98.5/99 market today, down about an eight of a point from the last session. As of Dec. 2, $5.619 billion total was outstanding on the term loans, SEC filings show.

Albertsons announced early Tuesday that it has agreed to acquire Rite Aid to create an integrated company that will be reportedly worth about $24 billion.

Following the closing of the deal, expected in the second half of 2018, Albertsons’ shareholders will own a 70.4–72% stake in the merged entity, while Rite Aid shareholders will own a 28–29.6% stake in the combined company.

 

The merged entities shares will trade on the New York Stock Exchange following the deal closing. (Albertsons is currently a privately held company controlled by Cerberus Capital Management.)

In a statement, Albertsons said the combined business is expected to generate year one revenue of about $83 billion and year one adjusted pro forma EBITDA of $3.7 billion, with a net leverage ratio of 3.8x at transaction close.

The combined company will operate about 4,900 locations, 4,350 pharmacy counters, and 320 clinics across 38 states and Washington, D.C.

Credit Suisse and Goldman Sachs served as lead financial advisors to Albertsons. Bank of America Merrill Lynch also served as financial advisor to Albertsons Companies and is providing committed financing for the proposed transaction together with Credit Suisse and Goldman Sachs. — Kelsey Butler/James Passeri

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Fridson: The HY Spread-Widening Accompanying Recent Stock Market Plunge Not an Anomaly Demanding an Explanation

Synopsis: The modest high-yield spread-widening that accompanied the early February stock market plunge was not an anomaly demanding an explanation.

Stocks’ long period of stability came to an abrupt halt on Groundhog Day and the non-investment-grade bond market’s response quickly became a topic of interest. Barron’s “The Trader” column noted that “the high-yield bond market is refusing to act as if a crisis is at hand” (see note 1). The “Current Yield” column elaborated:

The extra yield investors demand to hold high-yield bonds instead of Treasuries widened just 0.26% in the selloff, contrasting with 2015 and 2016: The Standard & Poor’s 500 fell 12% and 11% respectively, and high-yield spreads climbed 1.5% and 2.75%, notes FundStrat’s Tom Lee.

High-yield has been relatively stable, as Lee wrote Friday. “It is extremely unusual that HY would diverge so sharply,” he said (see note 2).

Let us explore that last statement a bit more closely. How unusual, in fact, is the high-yield’s comparatively muted response to the equity market selloff? In the week-over-week period from Feb. 1 to Feb. 8, preceding the one-day rebound on Friday, Feb. 9, the change in the level of the S&P 500 was –8.54%. During that same interval, the option-adjusted spread (OAS) on the ICE BofA Merrill Lynch US High Yield Index widened by 30 bps. The table below shows how the OAS behaved during all weekly stock market declines of comparable magnitude from 1990–2017:

It is true that the high-yield risk premium increased far more than the recent 30 bps in some previous major stock market selloffs. Note, however, that the three largest spread-widenings—126, 199, and 274 bps—all occurred during the Great Recession of January 2008–June 2009. In two other instances, including the worst weekly S&P 500 change in our sample of stock selloffs of a similar magnitude to the latest one (–10.54% in the week ending April 14, 2000), the ICE BAML High Yield Index’s OAS widened by less than the 30 bps widening from February 1–8. In fact, that stock plunge was accompanied by the smallest high-yield spread-widening in the sample, a barely positive two basis points.

While the sample size for these events is small, the limited evidence indicates that barring a recession, a high-yield spread-widening of only 30 bps is not anomalous. Granted, the spread widened by more than twice as much, 72 bps, in the non-recession week ended Aug. 5, 2011. Interestingly, that stock market selloff originated in the debt market. S&P Global Ratings downgraded the U.S. Treasury from AAA to AA+, adding that further downgrading was possible, and Moody’s warned that it, too, might lower its rating. This all happened in the context to fears that the debt crisis then engulfing Portugal, Ireland, and Greece would spread to Spain and Italy.

In short, one could even argue that a widening of 30 bps in the high-yield spread from Feb. 1 to Feb. 8 was an emphatic, rather than a reserved response to the stock selloff, considering that neither a recession nor a sovereign debt crisis was underway. Again, one should not overstate the importance of these conclusions, given the small number of observations. Still, it is by no means clear that there is a puzzle in need of solving in the current divergence between the equity and high-yield markets’ views of the factors that influence the values of risky assets.

Marty Fridson, Chief Investment Officer of Lehmann Livian Fridson Advisors LLC, is a contributing analyst to S&P Global Market Intelligence. His weekly leveraged finance commentary appears exclusively on LCD, an offering of S&P Global Market Intelligence. Marty can be reached at [email protected]

Research assistance by Kai Zhao and Yaxian Li.

 

Notes
1. Ben Levisohn, “After Correction Pain, More Market Gain?” Barron’s (Feb. 10, 2018).

2. Mary Childs, “Bonds Behaving Well: A Tale of Two Markets,” Barron’s (Feb. 10, 2018).

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Party Like It’s 2013? Loan Breaks Surge to 5-year High in January

The “January effect” was in overdrive last month, with bids in the U.S. leveraged loan secondary surging broadly and freshly inked deals advancing after entering the market, as investors proved eager to put cash to work.

It was a standout month, with the average break price soaring to 100.61% of par, the highest since January 2013, and well atop the 100.34 in December, according to LCD.

Averaged leveraged loan break price chart

There were six deals that freed to trade at a 101 bid or above in January, the most during a single month in five years: Crown Holdings, Oasis Outsourcing, Flexera Software, Tacala, NFP, and SnapAV.

In another throwback to the early 2013 market: The ratio of downward to upward flexes hit its highest level in five years, illustrating the stubbornly issuer-friendly tenor of today’s market. For the record, in January 2013 there were 26 downward flexes and zero upward flexes; last month, the flex ratio was 25:1.

Ratio of downward to upward flexes chart

Another eye-popping figure: The average difference between a loan’s original-issue discount and break price was 83 bps last month, the widest it’s been since April 2016, when the market was turning a corner from a long, dismal stretch of retail withdrawals. (January’s average difference is also much higher than the 66 and 63 bps gap in December and November, respectively.) — Kelsey Butler

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Revlon Refutes Asset-Transfer Rumors; Debt Climbs on 4Q Preview

Debt backing Revlon (NYSE: REV) was on the upswing today after the troubled cosmetics firm—whose bonds tumbled into distressed territory following lackluster earnings in November—unveiled better-than-expected preliminary results for its fourth quarter, indicating adjusted EBITDA above analyst expectations.

The cosmetics firm also addressed speculation that Revlon has been actively considering plans for an asset transfer in order to manage its debt load, with CFO Chris Peterson refuting such commentary as “false rumors and pure speculation,” highlighting in a Monday statement that “a material asset transfer is not being considered.”

Sources said some creditors were relieved that an asset transfer was not imminent, particularly as the issuer has alternative options for addressing nearing maturities, especially its 5.75% notes due 2021, pointing to debt-incurrence flexibility at non-guarantors.

Revlon 5.75% notes due 2021 and 6.25% notes due 2024 were up 1.25 points and 0.625 points, respectively, in morning trading, rising to 75.75 and 62.125, according to MarketAxess. The 2021 notes tumbled steadily into distressed over the past three months, from highs of 87.25 in early November, after Revlon booked third-quarter adjusted EBITDA that was roughly 49% below analyst estimates. Meanwhile, Revlon’s term loan due September 2023 (L+325, 0.75% LIBOR floor) was quoted at 75/78 this morning, up more than two points from before the news, sources said, and settling from bids of roughly 76 in late trading Monday. There was $1.738 billion outstanding on the term loan as of Sept. 30, SEC filings show.

Following a year of top-level management reshuffles, Revlon also said that CEO Fabian Garcia has stepped down from his role, as Revlon board member Paul Meister will become executive vice chairman of the board, overseeing day-to-day operations on an interim basis. Sources noted MacAndrews & Forbes, of which Meister is president, has a history of revamping operations at struggling companies, and that Meister may play a meaningful role in Revlon’s turnaround strategy.

Revlon said it now expects adjusted EBITDA for its fourth quarter to be within a range of $110–115 million, roughly 1.4% above analyst forecasts, based on consensus data compiled by S&P Global Market Intelligence, while expected net sales of $785 million for the period are roughly in line with estimates.

S&P Global Ratings on Nov. 16 downgraded Revlon’s corporate rating to B–, from B, citing concerns of elevated leverage in the wake of third-quarter results, and cut its ratings on the issuer’s unsecured notes and term loan to CCC+ and B–, respectively, from B– and B, while lowering its outlook on Revlon to negative from stable. Moody’s, meanwhile, maintains a B2 corporate rating on the issuer, with a stable outlook, and ratings on the unsecured notes and term loan of Caa1 and B1, respectively.

Revlon (NYSE: REV) is a New York-based manufacturer and marketer of beauty and personal care products worldwide. — James Passeri/Kelsey Butler

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