Fitch Rates Interpublic Group's Senior Note Offering 'BBB'; Outlook Stable
Fitch Ratings has assigned a 'BBB' rating to Interpublic Group of Companies' (IPG) proposed senior unsecured notes issuance due 2017 and 2023. The proceeds are expected to be used to fund the redemption of its $200 million 4.75% convertible notes due 2023 and its $600 million 10% senior unsecured notes. A full list of ratings is shown below.
This transaction prefunds 2013 note redemptions. Fitch recognizes that the proposed transaction is expected to be leverage neutral over the next 12 months and will benefit equity shareholder (by reducing the risk of equity dilution). The call of the 4.75% convertible notes will eliminate the potential conversion of the notes into shares. The 4.75% notes may be redeemed at par on or after March 15, 2013, and the 10% notes may be redeemed at 105% of the principal on or after July 15, 2013. Initially, pro forma September 2012 unadjusted gross leverage is expected to be 3 times (x). However, Fitch expects leverage to declines over the next 12 months, as the company completes its note redemptions.
IPG will issue the senior notes under the indenture dated March 2, 2012 (and supplemental indentures thereto). The notes will rank pari passu with the bank credit facility and the other senior unsecured notes.
Proposed terms are similar to previously issued senior notes. Terms include:
--A limitation on liens (excluding standard carve-outs), with permitted lien basket of up to 15% of consolidated net worth (Fitch estimates the basket at approximately $425 million);
--An obligation of IPG to repurchase the notes at 101% upon a change of control and rating trigger (as defined);
--Cross acceleration or payment default on debt greater than $50 million.
IPG has guided to positive organic growth in 2012, which incorporates 2% to 3% in organic headwind due to business losses in 2011. The company stated, as of year to date September 2012, IPG is in a net new business win position. Fitch expects IPG to continue to grow its EBITDA margins over time and reach competitive levels over the next few years.
Fitch views IPG's liquidity as solid, supported by a cash balance of $1.2 billion. Fitch believes liquidity would still be considered sufficient if the cash balance declined to between $500 million and $1 billion. However, Fitch expects IPG to maintain sufficient liquidity to handle seasonal working-capital swings. Fitch calculates free cash flow (FCF) as of the last twelve months September 2012 at break-even, driven primarily by working capital swings.
In addition to the $1.2 billion cash balance, IPG's liquidity is also supported by $984 million of availability under its $1 billion bank credit facility due 2016. Near-term maturities (excluding the redemption of the 4.75% convertible notes) include $350 million in senior notes due 2014.
In late February, IPG announced an additional $300 million share repurchase authorization and maintained the current dividend level. The rating incorporates Fitch's belief that the company will deploy liquidity, including FCF, towards share repurchases and acquisitions in a disciplined manner.
The ratings reflect Fitch's expectation that IPG will manage unadjusted gross leverage at a level around or below 2.5x. Fitch calculates LTM September 2012 unadjusted gross leverage at 2.1x. Total debt at September 2012 was $1.8 billion. This includes $111 million related to IPG's $221.5 million perpetual preferred stock, which receive 50% equity credit under Fitch's hybrid criteria.
The ratings also reflect IPG's position in the industry as one of the largest global advertising holding companies, its diverse client base, and the company's ample liquidity. While advertising is a cyclical industry, Fitch recognizes IPG and its global advertising agency holding companies (GHC) peers have reduced exposure to U.S. advertising cycles, by diversifying into international markets and marketing services businesses. In addition, the risk of revenue cyclicality is balanced by the scalable cost structures of IPG and the other GHCs.
What could trigger a rating action:
Positive: A public commitment by the company to maintain gross unadjusted leverage below 2.0x, coupled with peer-level EBITDA margins, could warrant upgrade consideration.
Negative: 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.
Fitch currently rates IPG as follows:
--Issuer Default Rating 'BBB';
--Senior unsecured notes (including convertibles) 'BBB';
--Bank credit facility 'BBB';
--Cumulative convertible perpetual preferred stock 'BB+'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' Aug. 12, 2011;
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' Dec 15, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
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