Omnicom Outlook Cut to 'Negative'
On June 13, 2002, Standard & Poor's revised its outlook on Omnicom Group Inc. to negative from stable. All ratings on the company, including the investment grade, single-'A' corporate credit rating, were affirmed. New York, N.Y.-based Omnicom had total debt outstanding of approximately $2.9 billion, and cash balances of more than $500 million at March 31, 2002.
The outlook revision reflected some uncertainty regarding how current controversies may affect business activities. Standard & Poor's recognizes that new account wins, which have been occurring at a good pace, are linked to confidence in management and business stability. Standard & Poor's current ratings on Omnicom are based on the soundness of the core business, appropriate accounting principles, and the company's ability to maintain sufficient liquidity and generate healthy discretionary cash flow that can be used to fund growth objectives, debt repayment, or share repurchases. Improving disclosure will likely be important for reestablishing credibility in the capital markets.
The ratings on Omnicom reflect its solid position among the top-three global advertising agency holding companies, a significant presence in diversified marketing services, and steady operating performance and account gains despite a cyclical downturn in advertising, and fairly moderate financial policies. These factors are somewhat tempered by the difficult revenue environment that could pressure organic revenue growth and margins over the near term, and ongoing acquisition activity. Standard & Poor's expects a greater use of equity to be used to help fund acquisitions and a slower pace of acquisitions, supporting key credit measures.
Omnicom's revenue growth and margins have been sustained in recent quarters, despite the depressed advertising environment, primarily due to consistent net new business wins, and good cost control and cash flow management. Account gains were respectable in the 2002 first quarter and throughout 2001, despite some slowdown in the pace of accounts coming up for review. Revenues are geographically well-diversified and do not have significant account concentration beyond DaimlerChrysler, which contributed about 5% of 2001 revenues. More than half of total revenues are derived in the U.S. Nontraditional advertising services, which will likely offer faster long-term growth compared with advertising, make up more than one-half of total revenues. Both geographic and product diversity have helped cushion the negative impact of U.S. economic uncertainty and the resulting downturn in ad spending.
For the last 12 months ended March 31, 2002, EBITDA coverage of interest expense was more than 14 times (x), greater than Standard & Poor's target for Omnicom at a single-'A' rating of between 10.5x and 11x. EBITDA plus rent expense coverage of interest plus rent expense, which Standard & Poor's considers an important measure, was about 3x for the same period.
At March 31, 2002, total debt to EBITDA was about 2.4x. Due to the seasonality in ad spending and working capital needs, debt levels tend to increase in the first quarter compared with year-end balances. Liquidity is derived from borrowing capacity under the company's revolving credit facility, committed lines of credit, and cash balances of more than $500 million at the end of the quarter. Sustaining good discretionary cash flow, which tends to build in the second half of the year, is an important ratings factor.
The ratings could be pressured if unanticipated developments negatively affect performance in the near term. Restoring investor confidence will be an important factor in re-establishing ratings stability.
From Standard & Poor's CreditWire