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Announcement:

Moody's changes MDC Partners outlook to negative; rates add-on notes B2

14 Apr 2011

Approximately $340 million of debt instruments affected

New York, April 14, 2011 -- Moody's Investors Service changed MDC Partners, Inc.'s (MDC) rating outlook to negative, downgraded the speculative-grade liquidity rating to SGL-3 from SGL-2 and assigned a B2 rating to the company's proposed $50 million add-on to its 11% senior unsecured notes due 2016. MDC plans to utilize the net proceeds from the note add-on to repay borrowings under its revolver that were drawn since the end of 2010 to fund contingent acquisition payments, acquisitions and seasonal borrowings. Loss given default point estimates were also updated to reflect the proposed add-on and the recent increase in the revolver commitment to $100 million. The B1 Corporate Family Rating (CFR) and Probability of Default Rating (PDR) are not affected.

Assignments:

..Issuer: MDC Partners Inc.

....Senior Unsecured Regular Bond/Debenture (add-on), Assigned a B2, LGD4 - 69%

Downgrades:

..Issuer: MDC Partners Inc.

.... Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

Loss Given Default Updates:

.....Senior Unsecured Regular Bond/Debenture (existing notes), Changed LGD4 - 69% from LGD4 - 63% (no change to B2 rating)

Outlook Actions:

..Issuer: MDC Partners Inc.

....Outlook, Changed To Negative From Stable

The change in the rating outlook to negative reflects Moody's concern that MDC will be challenged to reduce its very high leverage to a level more in line with the B1 CFR over the next 12-18 months. MDC has completed a series of acquisitions funded with debt and a material amount of earn-outs and also invested in additional staffing to support the company's aggressive growth initiatives. Debt-to-EBITDA leverage (6.8x FY 2010 pro forma for that proposed add-on and incorporating Moody's standard adjustments, deferred acquisition consideration, minority interest puts, and a full year of operations from the acquisitions completed in 2010) is well above the 5x upper limit anticipated in the ratings. Moody's expects MDC's leverage will decline in 2011 due to expected earnings growth, but returning to the 5x level or lower will likely be challenging. Free cash flow is expected to be modest, and MDC's comfort with incremental debt given the proposed add-on suggests limited debt reduction over the next 12-18 months.

The downgrade of the speculative-grade liquidity rating to SGL-3 reflects the company's modest cash flow in relation to the meaningful amount of potential cash needs for deferred acquisition consideration, minority interest puts and seasonal working capital, as well as MDC's modest cushion within the minimum EBITDA and total leverage covenants in its revolver. Moody's expects unused capacity under the $100 million revolver (approximately $85 million unused pro forma for the proposed offering and factoring in letters of credit) to be sufficient to cover the projected cash needs, but there is likely to be reliance on the facility. MDC has no required debt payments until the upsized $340 million of notes mature in 2016 and the revolver expires in October 2014.

MDC's B1 CFR reflects its modest revenue and cash flow and more significant client, industry, and geographic concentration than rated industry peers, which creates greater potential revenue volatility from the loss of key clients or creative personnel. The lack of scale contributes to margins that are well below industry peers, and is prompting the company to be acquisitive and increase staffing levels to pursue new business in an effort to generate high revenue growth. MDC is targeting a 1.5-2.5x net leverage ratio (excluding Moody's adjustments and with EBITDA calculated based on the revolving credit agreement terms), but the measure does not include items such as deferred acquisition consideration or minority interest puts that tripled during 2010 to approximately $186 million. Leverage based on the company's calculation has increased since the original bond offering in October 2009, but the increase was significantly greater when factoring these other obligations.

MDC is planning to scale back the level of acquisitions in 2011 but expects to continue to invest in additional staff in pursuit of aggressive revenue growth. Moody's expects MDC's organic revenue growth to exceed the average for the marketing services industry, but leverage is likely to remain elevated over the next 12-18 months.

Weak creative execution, client losses or a significant advertising downturn could result in a downgrade. A weakened liquidity position and/or deterioration in earnings, acquisitions or cash distributions to shareholders that sustains debt-to-EBITDA leverage above 5x or free cash flow-to-debt below 5% could also lead to a downgrade. Moody's believes the likelihood of an upgrade is low for the forseable future.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last Credit Rating Action and the rating history.

Please see the credit opinion posted to www.moodys.com for additional information on the company's ratings.

MDC's ratings were assigned by evaluating factors we believe are relevant to the credit profile of the issuer, such as i) the business risk and competitive position of the company versus others within its industry, ii) the capital structure and financial risk of the company, iii) the projected performance of the company over the near to intermediate term, and iv) management's track record and tolerance for risk. These attributes were compared against other issuers both within and outside of MDC's core industry and MDC's ratings are believed to be comparable to those of other issuers of similar credit risk.

MDC Partners Inc. is a marketing communications and consulting services holding company whose agencies serve customers across the globe. Revenue in FY 2010 was approximately $700 million.

New York
John E. Puchalla
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
John Diaz
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes MDC Partners outlook to negative; rates add-on notes B2
No Related Data.
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