Where Credit Is Due

In another bullish indicator of market turnaround, Fitch Ratings expects the ad industry to enjoy a more stable credit environment this year. After issuing company downgrades during the last few years, Fitch sees a return to better times: Revenue growth, coupled with leaner cost structures, should strengthen cash flow, which can be used to fund acquisitions and share repurchases, thus reducing the need to increase debt levels.

“As a result, credit measures are expected to strengthen for the [industry’s global holding companies] in 2004, lending stability to current rating levels,” said Fitch analyst Karen Lynch Ghaffari, who wrote a recent report on the industry. “Debt issuance in 2004 will be modest, as it is expected to be primarily for refinancing purposes. For the remainder of 2004, a total of $439 million of debt is maturing across the four [major holding companies].”

In 2003, Ghaffari noted, both Interpublic Group and Omnicom Group boosted liquidity by issuing convertible notes that allowed them to push out existing debt maturities, with the new securities extending the term of the initial “put” dates. (IPG also helped its liquidity position through an equity issue in December.) Ghaffari added that WPP Group is expected to refinance its maturing $424.6 million Eurobond issue in the first half of the year and “continues to benefit from a well-distributed debt maturity profile.”

While Publicis was active in the capital markets in the second half of 2003 and has prefinanced its 2004 maturities, Fitch has expressed some concern about its purchase of $460.9 million of credit-linked notes. The sophisticated credit derivative instrument could accelerate any decline in Publicis’ credit profile, Ghaffari said. Publicis has said it purchased the CLNs to benefit from exposure to its own risk since it expects its credit profile to improve over time.

The Fitch analyst emphasized the importance of organic revenue growth as a measure of operating performance, pointing out Omnicom’s ability to register gains during the downturn. She echoed IPG CFO Christopher Coughlin, who declined to provide net new-business data for the fourth quarter, saying that is not a meaningful indicator. “It may be an indicator of trends but not actually an indicator of revenue,” Ghaffari said.

While Fitch anticipates overall revenue growth in the coming year, thanks to higher ad spending, Ghaffari voiced caution about the influence of changing fee structures, the growing involvement of client procurement departments and “the evolution of advertising delivery.”

One positive trend for industry holding companies is that their cash flow is being helped by the fact that they are doing fewer share repurchases than they were doing a few years ago and making fewer acquisitions.

“Acquisitions are less a factor in creating additional leverage for these companies than they have been, particularly IPG,” said Fitch analyst Albert Turner.

One acquisition that may well happen this year, according to Fitch, is one involving Havas. “While previously seen as a contender to join [the industry’s major global holding companies, Havas] has lagged the group due to its limited scope of services and weakening competitive position,” Ghaffari said.