Fitch Affirms Interpublic Group's IDR at 'BBB'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of the Interpublic Group of Companies, Inc. (IPG) including its Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
--IPG's ratings reflect its position in the industry as one of the largest global advertising holding companies, its diverse client base, and the company's ample liquidity.
--The ratings incorporate the cyclicality of the advertising industry and potential top-line volatility due to client wins or losses in any given year. IPG has reduced its U.S. exposure to U.S. advertising cycles by diversifying into international markets and marketing services businesses. Roughly 45% of IPG's revenue is generated outside of the U.S. IPG delivered organic revenue growth of 2.8% in 2013. The company expects organic growth in the range of 3% to 4% in 2014, which Fitch believes is achievable and is slightly above Fitch's current forecast for U.S. GDP growth of 2.6% for 2014.
--The risk of revenue cyclicality is balanced by the scalable cost structures of IPG and the other global holding advertising companies (GHC). However, IPG still lags its peers in consolidated EBITDA margin. As of Dec. 31, 2013, Fitch calculates EBITDA margin of 12.1%, which compares to 15.3% for Omnicom Group, Inc. Fitch's base case model expects EBITDA margin to be in the range of 12.5% to 13% by year-end 2014. Fitch also expects IPG to achieve peer-level margins over the next four to five years, assuming low- to mid-single-digit organic revenue growth over this timeframe.
--The ratings reflect Fitch's expectation that IPG will manage unadjusted gross leverage to a level below 2.5x.
LEVERAGE AND LIQUIDITY
IPG's total debt outstanding at Dec. 31, 2013 was $1.7 billion and Fitch calculates unadjusted gross leverage at 1.9x.
Fitch views IPG's liquidity as solid, supported by a cash balance of $1.6 billion as of year-end 2013, in addition to $986 million of availability under its $1 billion revolving credit facility due Dec. 2018. The company's next two maturities are $350 million due in 2014 and $300 million due in 2017.
Fitch-calculated free cash flow (FCF) increased to $285 million in 2013 from $73 million in 2012. Fitch expects 2014 FCF in the range of $200 million to $300 million. In 2011 and 2012, working capital led to a drain of approximately $300 million. This drain was driven in part by working capital timing, organic revenue declines in the U.S. region (particularly in business lines that generate positive working capital) and organic growth in international regions. The working capital drain declined to $10 million in 2013. Fitch's 2014 FCF expectations include working capital drains of around $100 million. Fitch expects IPG to maintain sufficient liquidity to handle seasonal working capital swings.
Fitch's FCF expectation for 2014 also incorporates capital expenditures of $150 million. In addition, Fitch's FCF expectations incorporate IPG's increased quarterly common dividend to $0.095/share, which will have an approximately $35 million negative effect on FCF in 2014 (for total annual cash dividend payments of $160 million).
IPG's U.S. pension plan was $25 million underfunded as of the end of 2012. IPG should have no issues meeting any required U.S. pension plan funding.
In February of 2014, IPG announced an additional $300 million share repurchase authorization. The rating incorporates Fitch's belief that the company will deploy liquidity, including FCF, toward share repurchases and acquisitions in a disciplined manner.
Fitch recognizes the risk that the merger between Omnicom and Publicis may cause several of the other GHCs to consider larger acquisitions or merge with other GHCs. Fitch expects IPG to continue to target small bolt-on acquisitions and the current ratings do not contemplate or expect a materially large acquisition.
--A public commitment by the company to maintain gross unadjusted leverage below 2.0x coupled with peer level EBITDA margins could warrant upgrade consideration.
--Fitch is comfortable with management's willingness and ability to maintain its 'BBB' rating; however, a change in the company's posture toward maintaining adequate bondholder protection over the near and long term could affect the rating negatively. This may include an unadjusted gross leverage target greater than 2.5x.
Fitch has affirmed the following ratings:
--IDR at 'BBB';
--Bank credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);
--'Credit Encyclo-Media VI: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector' (Sept. 19, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Credit Encyclo-Media VI: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector