Omnicom Group, Inc. -- Moody's assigns Baa1 rating to Omnicom's new senior notes

Rating Action: Moody's assigns Baa1 rating to Omnicom's new senior notesGlobal Credit Research - 28 Apr 2021Approximately $750 million of new debt ratedNew York, April 28, 2021 -- Moody's Investors Service ("Moody's") assigned a Baa1 rating to Omnicom Group, Inc.'s ("Omnicom" or the "company") proposed offering of 10-year senior notes. Omnicom's Baa1 senior unsecured rating, Omnicom Capital Inc.'s and Omnicom Finance Limited's Prime-2 commercial paper ratings, and the stable outlook remain unchanged.Net proceeds, together with cash-on-hand, will be used to redeem all of the $1.25 billion outstanding 3.625% senior notes maturing 1 May 2022. The new senior notes will be issued by Omnicom Group, Inc. and rank pari passu with Omnicom's existing senior notes. Following is a summary of today's rating action:Assignment:..Issuer: Omnicom Group, Inc..Senior Unsecured Notes, Assigned Baa1The assigned rating is subject to review of final documentation and no material change to the size, terms and conditions of the transaction as advised to Moody's. Upon full extinguishment of the 3.625% senior notes due 2022, Moody's will withdraw the rating.RATINGS RATIONALEThe refinancing transaction is credit positive for Omnicom because it is deleveraging and will extend the debt maturity. Moody's expects Omnicom will use up to approximately $500 million of cash-on-hand together with net proceeds from the $750 million notes offering to fully repay the 2022 notes. As such, the company's total debt quantum will decline and pro forma financial leverage will decrease to below the 3x downgrade threshold to the 2.9x area from 3.1x total debt to EBITDA at 31 March 2021 (as calculated by Moody's, excluding one-time non-recurring expenses and restructuring costs).Omnicom's Baa1 senior unsecured rating reflects the company's: (i) considerable scale and resilience as the world's second largest ad agency holding company; (ii) customer-centric business model that delivers strong creative execution, valuable market insight and competitive marketing service product offerings that drive substantial annual cash flow generation; (iii) broad geographic diversification, high client retention and a large and diverse customer base across multiple industries; (iv) ) historical operating margin expansion (pre-COVID-19), which provided downside cushion as margins contracted during last year's ad spending declines, supported by a continual focus on expense management; and (v) strength in advertising, customer relationship management, healthcare and public relations disciplines, despite a more competitive operating environment and structural headwinds impacting global ad agency holding company peers. The rating also reflects Omnicom's strong liquidity profile evidenced by cash and cash equivalents totaling $4.9 billion, free cash flow generation (FCF) of $1.5 billion, FCF to debt of 19.8% and retained cash flow to net debt of 44.4% at LTM 31 March 2021 (credit metrics are Moody's adjusted).The rating is challenged by: (i) Omnicom's organic revenue growth underperformance arising from last year's EBITDA contraction as clients decreased media spending during the pandemic, particularly in the company's challenged verticals (i.e., travel, out-of-home entertainment, hospitality, auto/transportation, oil & gas, non-profit, financial services, retail, sports and live events) offset by strength in healthcare/pharmaceutical, technology and government sectors; (ii) sensitivity to cyclical client ad spending and economic and industry downturns; and (iii) an operating environment undergoing structural changes arising from the confluence of several factors that include: (1) the proliferation of digital technologies that are altering marketing delivery channels and consumer buying habits, (2) increasing competition from tech giants, ad tech firms and consultancies, and (3) secular spending shifts among certain client verticals.Notwithstanding the demand recovery in the services sector expected in 2021-22 boosted by the economic rebound, the rating considers the lingering economic scarring from the recession that could affect consumers' purchasing behavior and advertisers' willingness to maintain and/or increase marketing spending levels given the income weakness within some demographic segments and risks associated with the timing of the abatement of the pandemic. Offsetting these risks is Moody's view that advertisers will typically shift spend from brand awareness marketing to measurable digital, data-driven and performance-based advertising during periods of muted economic growth to reduce ROI risk, which benefits Omnicom's business model as it increasingly focuses on selective and customized ads via its data management platforms. Importantly, advertisers are shifting ad dollars to digital and data-driven marketing given the ability to deliver ads globally to a targeted audience that can be reached in a cost-effective and measurable manner. The scalability of an underlying data management platform and personalization of digital ads allow Omnicom's digital marketing agencies to build and refine customer profiles to enhance marketing effectiveness, which drives brand loyalty and improves sales conversion rates for clients. Moody's expects this secular trend to continue this year and afterwards as the virus subsides.The advertising industry is characterized by constant client turnover. Customary provisions in client contracts allow termination on relatively short notice, typically 30 to 90 days. However, this is counterbalanced by Omnicom's strong creative execution and customer-focused approach, which has enabled the company to historically offset industry headwinds through a combination of higher spend from existing clients and solid net new business wins both domestically and internationally. In 2020 and Q1 2021, organic revenue growth of -11.1% and -1.8%, respectively, underperformed Omnicom's global peers given that the company maintains a relatively larger exposure to third-party billable service costs chiefly associated with its experiential marketing services, which experienced sharp contractions in client spend as sporting and other live events were cancelled or postponed. Also, unlike its peers, Omnicom computes organic revenue growth based on total revenue rather than net revenue (which excludes third-party billable costs), which has the effect of overstating organic revenue declines given the company's large third-party cost component. Notably, in the four years prior to the pandemic (2016-19), Omnicom produced solid organic revenue growth that ranked in the top-tier among its peers.Omnicom's as-reported EBITA margin declined 200 basis points to 12.8% in 2020. However, excluding one-time restructuring charges of $277.9 million, which were actioned in response to the pandemic and to permanently reduce certain annual operating expenses, the company's EBITA margin increased 8 basis points to 14.8%. This underscores Omnicom's focus on cost management and high likelihood of achieving future operating margin expansion.The stable outlook reflects Omnicom's strong operating performance execution, focus on cost management and strong liquidity profile during the global ad spending contraction resulting from the COVID-19 health crisis and recession, and our expectation that operating performance will continue to improve over the next year as the economy recovers. The outlook also reflects our confidence that Omnicom will continue to effectively navigate the muted, albeit improving, ad spending environment, manage operating expenses and return to positive organic revenue growth beginning in Q2 2021 and all of 2021. We expect global advertising spend to grow in the range of 6%-8% this year (including cyclical events). As business conditions, consumer sentiment and household consumption improve coupled with the ad spending rebound, including strong pent-up advertiser demand in verticals in which Omnicom witnessed the biggest contractions last year, we believe the company will experience solid EBITDA performance and continue to reduce financial leverage as the year progresses.Moody's expects that Omnicom will maintain a strong liquidity profile over the next 12-18 months supported by its cash and cash equivalents balance (approximately $4.9 billion as of 31 March 2021), access to the $2 billion undrawn revolving credit facility (RCF) maturing February 2025 and projected free cash flow (FCF) generation in the range of $900 million to $1.25 billion over the next 12 months. At LTM 31 March 2021, FCF totaled $1.5 billion driven primarily by higher-than-normal working capital net inflows in the fourth quarter associated with seasonally strong media spending from clients offset by the timing of Omnicom's commitments to pay media costs on behalf of its clients, which typically occur in the first nine months of the following year, with the heaviest outlays in the first quarter. We expect Omnicom to prudently deploy excess cash-on-hand towards M&A that complements its core disciplines.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of corporate assets arising from the current weakness in US and overseas economic activity and gradual recovery over the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings 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 3x (Moody's adjusted), or a failure to maintain free cash flow to adjusted debt at or above 12.5%.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. 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. Revenue totaled approximately $13.2 billion for the twelve months ended 31 March 2021.The principal methodology used in this rating was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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