Interpublic Group of Companies (IPG) (rated 'BB+'; with a Positive Outlook by Fitch) released earnings this morning. As expected, organic revenue in the fourth quarter of 2008 was negative, at down 2.2% (but in-line with its peers) while EBITDA margins were healthy at 20.8%. On a full-year basis the company posted solid improvement in its cost base, reflected in a stronger EBITDA margin of 12.4%, compared to 9.6% in 2007. Free cashflow generation was also solid at approximately $700 million reflecting better EBITDA performance, low cash taxes and working capital improvements. Liquidity is strong; cash and marketable securities was $2.3 billion at Dec. 31, 2008 and the company has the capacity to meet its near-term debt maturities without relying on external sources.
Fitch will be meeting with management and evaluating the rating and Outlook in the coming months. As part of this review, it is possible the Positive Outlook could be maintained, which would reflect Fitch's belief that the rating could be raised to investment grade at some point in the next 12 to 18 months. The rating may also be stabilized at 'BB+' which would reflect uncertainty regarding the pace of further improvement in the company's credit profile. It is also possible, but less likely, that the rating could be raised to investment grade as part of this review.
The evaluation will take place within the context of Fitch's belief that there are a limited number of legitimate ad agency networks that can compete to be the lead for the ad business of major clients. Although not immune to some of the disruption associated with helping clients transition toward emerging media, the rational industry structure positions ad agencies to adapt to the changing media landscape. Margins have proven remarkably resilient through economic downturns, as Global Holding Companies (GHCs) benefit from the ability to scale their costs to preserve margins in down markets. Notwithstanding these mitigants, Fitch believes agencies could experience organic revenue deterioration of 5%-10% throughout this downturn.
Key factors in the analysis of IPG's rating and Outlook will include evaluating the depth of the current downturn on organic revenue growth, secular impacts including auto exposure, the degree of reversal of recent margin improvement under a negative growth environment, and sustainability of recent working capital improvements under negative growth in media buying.
Also, Fitch is cognizant that while IPG has only used its $335 million credit facility (due in 2011) and its Enhanced Liquidity Facility (ELF) capacity for letters of credit (LOCs) in the past five years, the bank agreement contains some restrictive financial covenants. Given the operating improvements achieved in 2008, the company has created additional cushion within its covenant thresholds, which should help the company to weather the continued operating pressures Fitch expects in 2009. Fitch estimates that EBITDA could decline more than 20% (assuming all else equal) before breaching any of its financial covenants.
As of Dec. 31, 2008, IPG's liquidity position is supported by $2.3 billion in cash and marketable securities. Net of $128 million in LOCs, the company had approximately $622 million available under its $750 million ELF and full availability under its $335 million credit facility. Fitch notes the $335 million credit facility has capacity for up to $200 million in LOCs. Near-term maturities include $250 million notes due November 2009, $250 million in 2010, and the ELF facility, which expires in June 2009.
Fitch's currently rates IPG as follows:
--Issuer Default Rating (IDR) 'BB+';
--Enhanced Liquidity Facility (ELF) 'BB+';
--Credit Facility 'BB+';
--Senior unsecured notes (including convertibles) 'BB+';
--Cumulative convertible perpetual preferred stock 'BB-';
For further information, see Fitch's report dated May 2, 2008, available on the Fitch Ratings web site at www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts:
Fitch Ratings
Mike Simonton, CFA, +1-312-368-3138 (Chicago)
Rolando
Larrondo, +1-212-908-9189 (Chicago)
Media Relations:
Cindy
Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com