Omnicom Finance Holdings plc — Moody’s assigns Prime-2 short-term rating to Omnicom Finance Holdings’ euro commercial paper program

Rating Action: Moody’s assigns Prime-2 short-term rating to Omnicom Finance Holdings’ euro commercial paper programGlobal Credit Research – 04 Feb 2022Approximately $500 million of new senior unsecured multi-currency euro commercial paper ratedNew York, February 04, 2022 — Moody’s Investors Service (« Moody’s ») has assigned a Prime-2 short-term rating to Omnicom Finance Holdings plc’s (« Omnicom Finance Holdings ») commercial paper (CP) program. Omnicom Group, Inc.’s (« Omnicom » or the « company ») Baa1 senior unsecured rating, Omnicom Capital Inc.’s and Omnicom Finance Limited’s Prime-2 commercial paper ratings, and their stable outlooks remain unchanged.Following is a summary of today’s rating action:Assignment:..Issuer: Omnicom Finance Holdings plc…..Senior Unsecured Commercial Paper, Assigned P-2The 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.RATINGS RATIONALEUK-based Omnicom Finance Holdings is a wholly-owned indirect subsidiary of Omnicom. Omnicom has established a euro CP program of up to $500 million USD equivalent at Omnicom Finance Holdings, which is incremental to its existing $2 billion US dollar CP program at Omnicom Capital Inc., a US-based wholly-owned direct subsidiary of Omnicom. The new euro CP program will have the ability to issue in euros, pound sterling and US dollars. Similar to Omnicom Capital Inc.’s Prime-2 rating, Omnicom Finance Holdings’ Prime-2 rating benefits from a payment guaranty from its ultimate parent and reflects Omnicom’s Baa1 rating and considerable scale as the second largest advertising agency holding company globally.The rating is further supported by the company’s strong liquidity profile bolstered by sizable cash and cash equivalents totaling $4.4 billion at 30 September 2021 and access to an undrawn $2.5 billion multi-currency revolving credit facility (RCF) maturing February 2025. The RCF will provide full backstop coverage for both CP programs. Omnicom’s revolver has historically been available to provide additional liquidity support given the seasonal nature of client spend, with the first quarter typically lowest in revenue (highest working capital usage) and the fourth quarter usually highest in revenue (positive working capital release). Liquidity sources are further buttressed by Moody’s expectation that Omnicom will generate approximately $950 million – $1.25 billion of free cash flow (FCF) (defined as CFO less capex less dividends) over the next 12 months.The RCF is provided by a diverse group of banks, has same day US dollar availability and does not require a general or litigation material adverse change (MAC) representation. Moody’s believes these features enhance the company’s ability to immediately access the facility as a backstop to the CP programs in periods of economic and financial market stress or to fund unanticipated cash needs. Moody’s expects Omnicom to periodically access CP for general corporate purposes, especially during periods of high working capital usage given its relatively low financing cost, as well as to refinance upcoming debt maturities. The existence of the 4x leverage covenant (as defined in the bank credit agreement, stepping down to 3.5x in Q1 2022) creates a degree of conditionality to accessing the RCF. Moody’s projects at least a 25% EBITDA cushion, which should allow for continued revolver access. At 30 September 2021, Omnicom’s bank-defined leverage was 2.2x.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 2020’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 pre-pandemic headwinds that impacted the large global ad agency holding companies. Omnicom benefits from moderately low leverage of 2.7x (Moody’s adjusted) and strong liquidity.The rating is challenged by: (i) sensitivity to cyclical client ad spending and economic and industry downturns; (ii) 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, digital marketing firms and consultancies, and (3) secular spending shifts among certain client verticals; and (iii) higher inflation in the economy that could pressure margins and moderate revenue growth to some extent due to rising operating expenses and a pullback in advertiser spending in a few verticals.Omnicom’s stable outlook reflects Moody’s expectation that the company will maintain a strong liquidity position 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 mid-single digit percentage range and emerging economies expanding at mid-to-high single digits. Moody’s expects global advertising spend to grow in the 10%-15% range this year (including cyclical events). As the economic recovery is sustained coupled with ad spending growth, including strong pent-up advertiser demand in verticals that witnessed the biggest contractions in 2020, Moody’s believes the company will experience solid EBITDA performance, albeit moderating from 2021 peak levels. Moody’s projects that Omnicom will maintain total debt to EBITDA (as calculated by Moody’s) in the 2.5x-3.0x area and FCF to adjusted debt in the15%-20% range (metrics are Moody’s adjusted).Moody’s forecasts that Omnicom will maintain a strong liquidity profile over the next 12-18 months supported by its cash and cash equivalents balance (approximately $4.4 billion at 30 September 2021), access to the $2.5 billion undrawn RCF and projected FCF generation in the $950 million – $1.25 billion range over the next 12 months. At LTM 30 September 2021, FCF totaled $1.87 billion. Moody’s expects Omnicom to prudently deploy excess cash-on-hand towards share repurchases and M&A that complements its core disciplines.ESG CONSIDERATIONSOmnicom’s Credit Impact Score is neutral-to-low (CIS-2), reflecting the company’s low environmental exposure, low social risk and low governance risk. Overall, the ESG risks do not have a material impact on the credit rating.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGRatings 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 backstop, working capital deficits, 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%.UK-based Omnicom Finance Holdings plc is a wholly-owned indirect subsidiary of New York-based Omnicom Group, Inc., the world’s second largest advertising, marketing and corporate communications agency holding company with revenue totaling approximately $14.2 billion for the twelve months ended 30 September 2021. 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.The principal methodology used in this rating was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. 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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Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.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. 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