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Rating Action:

Moody's confirms IPG's Baa2 senior unsecured and Prime-2 short-term ratings; outlook now stable

17 Sep 2018

New York, September 17, 2018 -- Moody's Investors Service ("Moody's") has confirmed The Interpublic Group of Companies, Inc.'s ("IPG" or the "company") Baa2 senior unsecured rating and Prime-2 commercial paper rating. The rating outlook is stable. This concludes the ratings review that commenced on 3 July 2018.

Following is a summary of today's rating actions:

...Issuer: The Interpublic Group of Companies, Inc.

Ratings Confirmed:

....Senior Unsecured Bank Credit Facility -- Baa2

....Senior Unsecured Regular Bond/Debentures -- Baa2

....Commercial Paper -- P-2

Outlook Actions:

....Outlook, Changed To Stable From Rating Under Review

RATINGS RATIONALE

Moody's initiated the review following IPG's announcement that it agreed to purchase Acxiom Corporation's Acxiom Marketing Solutions business ("AMS" or "Acxiom Marketing") for $2.3 billion and finance the transaction entirely with debt. We projected pro forma financial leverage would increase above the 3.25x downgrade trigger to roughly 4x total debt to EBITDA (incorporating Moody's adjustments and AMS LTM EBITDA). The rating confirmation reflects our belief IPG is committed to the Baa2 rating and will de-lever over the 18-month period after transaction closing through a combination of debt reduction and EBITDA expansion, and sustain strong credit metrics thereafter. The company plans to raise debt totaling $2.5 billion to finance the purchase, repay outstanding commercial paper and pay transaction fees. On 27 July 2018, the first leg of the debt raise was completed when IPG closed on a new (unrated) $500 million term loan A maturing 2021 with existing lenders. We expect the final leg to consist of issuing new senior debt tranches with staggered maturities totaling $2 billion. During the de-leveraging period, IPG will not have flexibility to incur additional debt that would cause its leverage metrics to reverse course from a de-leveraging path.

Moody's rating confirmation acknowledges management's commitment to quickly de-lever below 3.25x total debt to EBITDA (Moody's adjusted) by temporarily suspending its share repurchase program, minimizing M&A activity and moderating the dividend growth rate over the rating horizon, thereby preserving cash to make voluntary debt repayments above mandatory outlays. The new term loan is subject to a maximum leverage covenant of 3.5x that increases to 4x on the transaction closing date until the fourth fiscal quarter after closing. The covenant steps down to 3.75x on the last day of the fourth fiscal quarter after closing and then steps down to 3.5x on the last day of the eighth fiscal quarter and thereafter.

The Baa2 senior unsecured rating incorporates our belief that AMS will accelerate IPG's ability to use data science and analytics via Acxiom Marketing's vast wealth of ethically-sourced online and offline data about consumer behaviors to help leading brands acquire and retain higher value customers by leveraging digital marketing campaigns that result in high converting sales. AMS generates just under $700 million in annual revenue and provides tools to help clients gather and organize their customers' data to improve interactions with their customers and engage in outcome driven marketing. By leveraging its recognition and data assets, their clients can identify, segment, and differentiate their audiences and create a single customer view across multiple media channels, thereby executing more effective marketing campaigns.

Moody's believes AMS will help IPG continue to evolve the traditional advertising agency model and integrate its service offerings with a data and technology-based practice that addresses changing consumer habits and media usage. A key characteristic of the AMS advanced marketing business is addressability, which allows advertisers to direct different messages to different segments of the audience based on geographic, demographic and behavioral data. Moody's believes AMS will enhance IPG's ability to create personalized brand experiences across multiple consumer touchpoints, giving it a solid competitive advantage, which should lead to sustained organic revenue growth in the 3-5% range over the rating horizon.

IPG's Baa2 rating reflects its scale as the fourth-largest global ad agency holding company, strong creative execution and competitive marketing service product offerings that drive solid cash flow generation. IPG's broad geographic, client and industry diversification and strength in media, public relations, advertising and marketing services disciplines have led to industry-leading organic revenue growth despite an industrywide slowdown among the leading ad agency holding companies and heightened competition. Though revenue and earnings are exposed to cyclical client spending, IPG has demonstrated an ability to weather industry and economic downturns with strong liquidity and continued focus on operating expense management.

IPG has expanded operating margins and narrowed the margin gap with competitors. We expect further progress over the rating horizon via revenue growth from net new business wins, further penetration into existing accounts and continued focus on cost management.

The rating is constrained by the challenging operating environment stemming from: 1) cyclical and secular spending shifts among certain clients, 2) increasing competition from encroaching tech giants, ad tech firms and consultancies, and 3) proliferation of digital technologies that are altering marketing delivery channels and consumer buying habits. Lower than historical cash balances could delay deleveraging trends if the working capital deficit meaningfully exceeds cash and marketable securities balances since we include the deficit net of cash in our calculation for adjusted debt. The rating also captures IPG's seasonal working capital swings, albeit offset by initiatives to improve working capital metrics.

We believe IPG's prospective free cash flow generation (i.e., CFO less capex less dividends), which we estimate at roughly $375-$400 million in 2019, solid cash balances and $1.5 billion revolver collectively support the Prime-2 short-term rating and provide strong liquidity to fund potential cash needs as well as its cyclical working capital.

Rating Outlook

The stable rating outlook reflects our expectation that IPG will demonstrate low- to mid-single digit organic revenue growth, improve operating margins and reduce total debt to EBITDA below 3.25x (Moody's adjusted) within 18 months after closing the AMS transaction. We also expect IPG will maintain a strong liquidity profile and prudent financial policies over the long-term.

What Could Change the Rating -- Up

Ratings could be upgraded if IPG achieves and sustains operating margins (as-reported) at or above the industry peer group average, generates meaningful and consistently positive free cash flow with retained cash flow to debt approaching 40% (Moody's adjusted), sustains total debt to EBITDA below 2.75x (Moody's adjusted) and maintains a strong liquidity position.

What Could Change the Rating -- Down

Ratings could experience downward pressure if IPG experiences a material loss of clients, market share erosion and/or substantial pricing pressures that lead to below average organic revenue growth or operating margin degradation. Total debt to EBITDA sustained above 3.25x (Moody's adjusted) 18 months after closing the AMS transaction or deterioration in liquidity could also result in a downgrade.

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, NY, The Interpublic Group of Companies, Inc. is the world's fourth-largest advertising, marketing and corporate communications holding company. With offices in over 100 countries, IPG's 50,200 employees provide consumer advertising, digital marketing, communications planning, media buying, public relations and specialized communications services to the world's most recognizable companies and brands. Net revenue totaled approximately $7.7 billion for the twelve months ended 30 June 2018.

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

John Diaz
MD - Corporate Finance
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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