Advertising giant Omnicom Group Inc.OMC announced the pricing of its public offering of 10-year senior notes, worth $1.4 billion in aggregate. The notes will bear an interest rate of 3.60% per annum, and will mature on Apr 15, 2026.
Leading credit rating agency Moody's has assigned a Baa1 rating to the issue, along with a stable outlook. Baa1 is an investment grade rating and indicates the presence of moderate credit risk with some speculative characteristics.
The unsecured notes will be guaranteed by Omnicom Group, Inc. and Omnicom Capital Inc. on a joint and several basis. The proposed issue is expected to close on Apr 6, 2016, conditional on customary closing conditions.
Omnicom intends to use the net proceeds from the offering for general corporate purposes, like working capital needs, acquisitions, fixed asset expenditures, debt refinancing and stock repurchases. The proceeds will likely be used for the retirement of the company's existing 5.9% senior notes worth $1 billion, which will mature on Apr 15, 2016.
The Baa1 rating assigned by Moody reflects Omnicom's improved short-term liquidity position. The note issuance will extend the company's maturity profile while decreasing its cash interest costs by about $10-$15 million annually.
As the second biggest global advertising and marketing service agency group, Omnicom has an extensive geographic footprint, high client retention and a huge, diverse customer base. Despite slackening global economic growth, Moody's expects Omnicom to grow at a moderate pace in 2016. The company also has an edge over the traditional single-channel media firms and can navigate technology driven shifts more quickly and efficiently.
In addition, Omnicom robust free cash flow generation and an undrawn balance of $2.5 billion under its credit facility provide adequate liquidity to the company for potential cash needs and its extremely seasonal working capital requirements.
Omnicom's ratings could receive an upgrade if its operating performance improves, and if it can sustain required leverage targets throughout economic cycles. Also, strong liquidity, robust projected free cash flow and undrawn committed multi-year revolver capacity are factors that could earn Omnicom an upgrade.
Conversely, insufficient liquidity that is not adequate for handling working capital deficit and other potential cash needs could lead to a downgrade. Factors like sustained economic slump, lower market share, debt-financed acquisitions and cash distributions to shareholders could exert downward pressure on ratings as well.
Omnicom presently holds a Zacks Rank #2 (Buy). Other favorably placed stocks in the advertising/marketing services space include Marin Software Incorporated MRIN , MDC Partners Inc. MDCA and Publicis Groupe SA PUBGY , each carrying the same rank as Omnicom.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.