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Rating Action:

Moody's affirms Omnicom's senior unsecured ratings at Baa1 and rates new notes Baa1; outlook stable

27 Mar 2020

Approximately $5.1 billion of existing rated debt impacted

New York, March 27, 2020 -- Moody's Investors Service ("Moody's") has affirmed Omnicom Group, Inc.'s ("Omnicom" or the "company") Baa1 senior unsecured long-term ratings and Prime-2 commercial paper rating. Moody's also assigned a Baa1 rating to Omnicom's proposed senior unsecured notes offering. Omnicom's outlook remains stable. The full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Pro forma for today's notes offering and the recently issued $600 million 2.45% senior notes due 2030, Moody's estimates Omnicom's financial leverage will increase modestly to around 3.0x (as calculated by Moody's) from 2.8x at 31 December 2019. Net proceeds will be used as an additional backstop to further enhance the company's already robust liquidity as Omnicom enters a period of seasonal working capital cash outlays at a time when there is increasing economic uncertainty associated with the global coronavirus pandemic. Moody's expects the company's sizable cash balances and short-term investments ($4.3 billion at 31 December 2019), strong free cash flow generation of $1.1 billion and undrawn $2.5 billion revolving credit facility maturing 2025 (unrated) will provide more than sufficient liquidity to fund potential cash needs that will surface during this period of economic contraction.

Omnicom's Baa1 rating reflects its considerable scale as the world's second largest advertising agency holding company combined with a customer-centric business model that delivers strong creative execution, valuable market insight and competitive marketing service product offerings that drive sizable annual cash flow generation. The rating also embeds Omnicom's historically steady organic revenue growth and operating performance trends across market cycles and conservative financial policies relative to its ad agency holding company peers. Though revenue and cash flows are sensitive to cyclical client ad spending, broad geographic diversification, high client retention and a large and diverse customer base collectively support Omnicom's strong business position.

Revenue is likely to experience meaningful contraction this year due the economic effects of the coronavirus outbreak on client ad spending, especially in challenged sectors such as travel, hospitality, autos and retail. However, Moody's expects the company to proactively reduce operating expenses in the short-run given that nearly 70% of its cost structure is variable. This should enable Omnicom to absorb minimal operating margin erosion in the range of 100-150 basis points. Moody's also expects the company to focus on preserving cash by judiciously managing working capital, reducing capital expenditures, deferring or reducing bonus payments and prudently managing share repurchases and dividends. Despite the challenged operating environment, Moody's expects Omnicom to generate positive free cash flow this year. While financial leverage will increase this year as EBITDA contracts, Moody's expects it to be manageable and revert to under 3.0x (as calculated by Moody's) in 2021 as above trend economic growth resumes. Moody's assessment looks beyond the coming downcycle and believes Omnicom will emerge from the ad spending contraction in a stronger operating position relative to peers as household consumption and pent-up advertiser demand increase after the virus threat is neutralized.

To address the cyclical and secular spending shifts as well as increasing competition within its industry, Omnicom has adapted its service offerings to changing consumer preferences and embraced the transition to digital media platforms. Similar to its ad agency holding company peers, the company is realigning its business model to adjust to the new media landscape by disposing of non-core assets, reducing headcount, replacing staff with new talent, accelerating cost reductions and consolidating its real estate footprint. Moody's believes strong creative execution combined with the ability to access and transform relevant data into valuable, useful and actionable market insights integrated with predictive analytics will be critical for the large ad agency holding companies to maintain and expand market share going forward.

The stable outlook reflects Moody's expectation that Omnicom's management will maintain a strong liquidity position, proactively reduce costs and prudently manage discretionary cash outlays to cover operating cash needs during this period of economic and client spending contraction prompted by the COVID-19 outbreak. While Omnicom's debt protection measures will experience fluctuations outside of their normal ranges, Moody's does not expect the volatility to be pronounced. The company's highly variable operating cost model, which can quickly adapt to sudden revenue changes, and commitment to conservative financial policies will enable Omnicom to return leverage to the appropriate level for the rating category.

Ratings could be upgraded if Omnicom demonstrates strong operating performance, stable to growing market share, and a willingness to sustain total debt to EBITDA comfortably below 2.5x (Moody's adjusted) and free cash flow to adjusted debt well above 18% through economic cycles. A strong liquidity position with sufficient cash, projected free cash flow and unused committed multi-year revolver capacity to comfortably cover all potential liquidity needs would be necessary for an upgrade. Ratings could be downgraded if Omnicom does not maintain sufficient liquidity support for commercial paper back-stop, any working capital deficit, acquisition earn-outs and other potential cash needs. Downward ratings pressure could also occur from a decline in market share, a prolonged economic downturn, debt-financed acquisitions and/or cash distributions to shareholders that lead to total debt to EBITDA for a sustained period above 3.0x (Moody's adjusted), or a failure to maintain free cash flow to adjusted debt at or above 12.5%.

ESG CONSIDERATIONS

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The advertising agency sector has been one of the sectors affected by the shock given its sensitivity to consumer demand and advertising spend. More specifically, the challenges in Omnicom's credit profile, including its exposure to the US and European economies as well as the more challenged economic sectors, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Omnicom remains vulnerable to the outbreak's continuing spread. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

SUMMARY OF TODAY'S RATING ACTIONS

Assignments:

..Issuer: Omnicom Group, Inc.

.Senior Unsecured Notes, Assigned Baa1

Affirmations:

..Issuer: Omnicom Group, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

.Senior Unsecured Shelf, Affirmed (P)Baa1

..Issuer: Omnicom Capital Inc.

.Senior Unsecured Shelf, Affirmed (P)Baa1

....Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Omnicom Finance Limited

....Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Omnicom Finance Holdings plc

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

.Senior Unsecured Shelf, Affirmed (P)Baa1

Outlook Actions:

..Issuer: Omnicom Group, Inc.

Outlook, Stable

..Issuer: Omnicom Capital Inc.

Outlook, Stable

..Issuer: Omnicom Finance Limited

Outlook, Stable

The assigned rating is subject to review of final documentation and no material change in the size, terms and conditions of the transaction as advised to Moody's.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in New York, N.Y., Omnicom Group, Inc., is the world's second largest advertising, marketing and corporate communications agency holding company with revenue totaling approximately $15 billion for fiscal year ended 31 December 2019. Omnicom's branded agency networks and numerous specialty firms provide advertising, strategic media planning and buying, digital and interactive marketing, direct and promotional marketing, public relations and other professional communications services to more than 5,000 clients in over 100 countries.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gregory A. Fraser, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Stephen Sohn
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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