Oct. 28, 2009 (Business Wire) -- Interpublic Group of Companies (IPG), which is rated 'BB+' with a Positive Outlook by Fitch Ratings, released earnings this morning. As expected, third quarter revenues were down (18%), driven by organic revenue decline of 14.2%. While the top line performance has been slightly worse than Fitch expected, cost cutting initiatives (particularly on office and general) have been aggressive enough to maintain EBITDA margin contractions within Fitch's expectation of around 200 basis points (bps). The company has aggressively cut cost in both salaries (headcount down 11% with salaries expense down 6.5% organically year to date [YTD]) and office and general (down 13.4% organically YTD). This attention to margins has helped keep credit measures in line with IPG's rating and outlook.
The weak revenue performance is a result of the current advertising and marketing environment and has affected all of IPG's peers. Fitch still expects IPG to look more like its investment grade peers within the next 12 to 18 months.
The ratings continue to reflect the following:
--IPG's position in the industry as one of the largest global advertising holding companies, the inherent scalability of its cost structure, its diverse client base and the company's ample liquidity.
--IPG's business risk profile and credit metrics could reflect investment-grade characteristics in late 2010. Fitch believes management has the willingness, ability and incentive to achieve investment-grade ratings.
--Credit metrics have improved significantly from 2005 levels (leverage is down from 12.4 times [x] to 3.0x).
While 2009 has been challenging for IPG and all global advertising agency holding companies (GHC), Fitch has always incorporated a potential downturn into IPG's ratings.
In considering a potential upgrade, Fitch will focus on several factors over the next 12 to 18 months. First, Fitch will monitor IPG's ability to achieve 2009 organic revenue trends and margin compression generally in-line with the industry. Next, Fitch will evaluate the degree of working capital volatility and IPG's ability to manage working capital swings such that they do not meaningfully minimize Free Cash Flow (FCF) generation.
FCF for September 2009 LTM was approximately $400 million. Fitch expects FCF to be positive in the range of $100 to $300 million for the year. As of Sept. 30, 2009, IPG's liquidity position is supported by the $1.8 billion in cash and equivalents and $241 million available under its $335 bank credit facility due July 2011 (reduced by $94 million in letters of credit [LOC]).
Fitch calculates unadjusted gross leverage of approximately 3.0x and expects that year end unadjusted gross leverage will be in the range of 3.0x to 3.25x, which is within IPG's rating and outlook.
While IPG's leverage ratio covenant has limited room for further deterioration (a 4% decline in covenant EBITDA would likely breach the 3.25x leverage ratio), Fitch believes the company could potentially obtain a waiver or an amendment to resolve this issue. Such a negotiation could involve amendment fees or potentially revised pricing. Also, IPG could cancel the bank facility and cash collateralize its existing LOCs ($94 million as of September 2009). The company does not utilize the revolver for operations, and the company's significant cash balance should provide sufficient liquidity.
IPG's ratings are as follows:
--Issuer Default Rating (IDR) 'BB+';
--Senior unsecured notes 'BB+';
--Bank credit facility 'BB+';
--Preferred stock 'BB-'.
The Rating Outlook is Positive.
For additional information please see Fitch's Credit Encyclo-Media special report or IPG's 14-page report dated June 8, 2009, both available on Fitch's web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: http://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.
