Holding Cos. Face Credit Crunch

NEW YORK As industry forecasters revise their estimates for 2009 global ad spending downward, credit ratings agencies are voicing new concerns about sector companies.Last week, Standard & Poor's ratings services revised its outlook on WPP Group and Publicis Groupe to "negative" from "stable." S&P already has Omnicom on a negative "Creditwatch," meaning a change in investment grade could occur within 90 days.Earlier this month, Moody's Investors Service changed its outlook for WPP's senior unsecured debt to "negative" from "stable," referencing the company's mainly debt-financed $2.3 billion acquisition of Taylor Nelson Sofres. In February, Moody's revised Omnicom's outlook to "negative" from "stable," citing liquidity concerns.As the first quarter ends, industry forecasters are already revising their expectations about the year. Last week Aegis Group's Carat unit said it now believes U.S. ad spending will drop 9.8 percent and decline 5.8 percent globally from 2008. GroupM expects to release a revised forecast this week, and ZenithOptimedia its outlook on April 6."These companies all grew in 2008. In '09, they're definitely going to shrink, given everybody's projection of the numbers," said one Wall Street analyst. "If your profits are shrinking, your debt looks that much bigger compared to your profit."Adam Smith, the futures director at GroupM, said that for the U.S. the company's new forecast won't be materially different from the 3 percent decline projected in December, but more drastic revisions will be made in faster-growth emerging markets like China, Russia and the Mideast Gulf region. At ZenithOptimedia, head of publications Jonathan Barnard said the company is still finalizing its numbers, but confirmed that its forecast of a 6.2 percent decline, made in December, will now show a deeper slide.With the recession in its second year, Wall Street sees no signs of an industry uptick. Based on spending trends in the TV marketplace, it's expected that the second quarter will be a lot worse than Q1, which deteriorated from the fourth quarter of 2008. "We don't even know if we're at the bottom of the economic environment, [let alone] the bottom of the ad market," said the Wall Street analyst.Last week, S&P also lowered WPP's short-term ratings to A-3 from A-2. Melvyn Cooke, an S&P credit analyst, said the current slump "may lead to significantly slower-than-expected deleveraging at WPP and even to increased leverage in the short term." Cooke believes WPP's ratio of adjusted average debt to EBITDA is likely to exceed 3.5 times by the end of 2009, a high level, he said, for a BBB rating. (Anything below BBB- is considered junk or speculative grade by S&P.)As for Publicis, Cooke raised concerns about its client General Motors, should the automaker declare bankruptcy.Moody's said that Omnicom's negative outlook reflects heightened risk that potential liquidity needs could exceed the unused capacity on Omnicom's $2.5 billion revolving line of credit. Among the concerns cited by Moody's: "Significant potential liquidity needs could exist in a downside scenario from putable bonds [bonds that give the holder the right to sell, or put, the bond to Omnicom prior to its maturity date] through 2010, which is two-thirds of Omnicom's debt structure."S&P rep Chris Atkins said the marketing communications industry is actually faring quite well in comparison to the rest of corporate America. He estimated that only about 20 percent of U.S. companies are currently investment grade. With the exception of Interpublic Group of Companies, other industry players fall into that investment grade category, he said.Investment-grade ratings are considered important for the industry because of the significant amount of client money that flows through agencies, instilling a need for client confidence and conservative management of debt.

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Holding Cos. Face Credit Crunch

Noreen O'Leary

Andrew McMains

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Noreen O'Leary

Andrew McMains