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Rating Action:

Moody's assigns Baa1 rating to Omnicom Finance's new sr unsecured euro notes

24 Jun 2019

Up to €1 billion of new debt rated

New York, June 24, 2019 -- Moody's Investors Service ("Moody's") assigned a Baa1 rating to Omnicom Finance Holdings plc's ("Omnicom Finance") proposed senior unsecured euro notes offering targeting 8 to 12 year maturities of up to €1 billion (USD1.14 billion equivalent). Omnicom Finance is domiciled in London, UK and a wholly-owned subsidiary of Omnicom Group, Inc. ("Omnicom" or the "company"). Omnicom's Baa1 long-term debt rating and stable outlook remain unchanged.

Following is a summary of today's rating action:

Assignments:

..Issuer: Omnicom Finance Holdings plc

....Up to €1 Billion Gtd Senior Unsecured Notes, Assigned Baa1

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

RATINGS RATIONALE

The transaction is leverage and credit neutral since Moody's expects Omnicom to use the bulk of net offering proceeds to repay the $500 million 6.25% senior notes due 15 July 2019 at maturity, with the remaining net proceeds to be used for additional debt repayment and general corporate purposes. The new notes will benefit from payment guarantees from Omnicom Group, Inc. and Omnicom Capital Inc. (a wholly-owned subsidiary of Omnicom). 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. Though revenue and cash flow are sensitive to cyclical client spending, broad geographic diversification, high client retention and a large and diverse customer base collectively support Omnicom's strong business position.

Moody's expects global advertising spend will slow this year to a 4%-5% pace due to the lack of cyclical events, with digital advertising spend up 10%-13%. The finance, insurance, pharmaceuticals and technology verticals and Latin America, Asia-Pacific and Emerging Markets will be the chief drivers of spend. However, Moody's anticipates Omnicom's organic revenue growth will be in the 2%-3% range given the challenging low revenue growth environment facing the large ad agency holding companies. This stems from the cyclical and secular spending shifts among certain clients, increasing competition from encroaching tech giants, ad tech firms and consultancies, and proliferation of digital technologies that are altering marketing delivery channels and consumer buying habits. To remain competitive, Omnicom must continually adapt service offerings to changing consumer preferences and embrace the transition to digital media platforms and the resulting effect on advertiser/marketer behavior. 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 market share going forward.

Similar to its ad agency holding company peers, Omnicom 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. During this adjustment period, Moody's expects reported operating margin (excluding one-time repositioning expense items and net gains on asset disposals) to fall in the range of 12.5%-13.5% and financial leverage as measured by total debt to EBITDA (Moody's adjusted) to remain at the high end of the 2.5x-3.0x range (2.9x at LTM 31 March 2019).

Among the Big Four ad agency holding companies, Omnicom reported the second-best organic revenue growth in 2018 at 2.5% as it cycled through client losses from the prior year and experienced gains in new business. Last year, Omnicom's BBDO ad agency network was awarded the bulk of Ford Motor Company's (Baa3 negative) creative business from the incumbent, WPP Plc (WPP's rated subsidiaries, including WPP Finance S.A., are rated Baa2 negative). Moody's estimates the Ford account will contribute to organic revenue growth in 2019, a credit positive.

Omnicom continues to operate with strong liquidity. Moody's believes the company's cash balances and short-term investments of $3.5 billion at 31 March 2019, solid free cash flow generation and undrawn $2.5 billion credit facility provide sufficient liquidity to fund potential cash needs and its highly seasonal working capital.

Outlook

The stable outlook reflects Moody's expectations that Omnicom will maintain strong liquidity to cover potential cash needs and manage through client spending fluctuations. The stable outlook is premised on continued global economic expansion with developed markets growing in a low-single digit range and emerging economies expanding at mid-single digits. The stable outlook also factors in Moody's assumption that Omnicom will maintain total debt to EBITDA (Moody's adjusted) in a range of 2.5x-3.0x and free cash flow to adjusted debt in a range of 12.5%-18% (13.7% at LTM 31 March 2019) with free cash flow utilized for share repurchases and tuck-in acquisitions.

Factors That Could Lead to an Upgrade

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 comfortably above 18% through economic cycles. Given the high dividend payout, the rating also reflects a more aggressive liquidity position relative to single-A rated issuers. Consequently 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.

Factors That Could Lead to a Downgrade

Downward rating pressure could occur if Omnicom does not maintain sufficient liquidity support for commercial paper back-stop, the working capital deficit, acquisition earn-outs and other potential cash needs. 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 above 3.0x (Moody's adjusted), or a failure to maintain free cash flow to adjusted debt at or above 12.5% could also lead to a downgrade.

The principal methodology used in this rating 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 $15.1 billion for the twelve months ended 31 March 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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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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