Double downgrade dents Oriflame bond recovery
Published 23 March 2022, 19:17
Moody’s is the second ratings agency in the space of only a few days to downgrade Oriflame, forcing the borrower’s bonds to retrace some of the gains they have made since mid-March.
Since Russia’s invasion of Ukraine on February 24, Oriflame has been highlighted as a European high-yield name that is likely to be greatly impacted by the conflict. It is heavily exposed to the region, with around 16% of the Swedish-Swiss beauty product marketing company’s revenues coming from the Russian market.
Oriflame’s second largest production plant is also located in Russia and, this Monday, the company announced it had stopped exporting products from this plant to its international warehouses.
In a statement, the issuer also said it “will further reduce operations in Russia by suspending investments, marketing, training and events”, while also suspending end sales to consumers in the country.
Because of this direct exposure, combined with the expected negative effect of increased raw material costs, energy prices and logistics expenses, the ratings agencies have begun to slash the borrower’s credit standing.
On Tuesday, Moody’s announced a one-notch cut to B2 (stable). This follows S&P, which on March 18 reduced its issuer rating to B (stable) from B+. Fitch has not downgraded Oriflame, which it has had at B+ since April 2021.
Downgrades from two of the three major agencies have been reversed some of the recent recovery seen in the price of Oriflame’s bonds.
Between the start of the war and March 8, the price of its paper dropped significantly. Its US$550m 5.125% May 2026 fell more than 18 points on Tradeweb. But an improvement in credit markets more broadly had helped the bonds recover some of this lost ground. As the downgrades rolled in, however, prices once again began to fall.
The 5.125% May 2026 is now bid at 79.524 and the issuer’s other outstanding bond – a US$250m May 2026 FRN – is bid at 79.974.
Analysts are conflicted on what the downgrades mean for the bonds. Following the S&P announcement, Spread Research reiterated a sell recommendation on the FRN, citing the deteriorating credit and uncertainty over whether the company could successfully reallocate Russian production capacity.
“We anticipate that the Russia-Ukraine conflict will significantly impact overall operating performance,” said Si Yong Ng, an analyst at Lucror Analytics. “That said, the company's flexible cost structure and asset-light business model should enable it to partly offset the impact on cash flow.”
He added that Oriflame’s current liquidity levels should allow it to withstand a period of poor performance.