MDC Partners Inc. 'B' Issuer Credit Rating Affirmed On Capital Structure Shifts; Outlook Stable

  • U.S. advertising agency MDC Partners Inc. recently amended its credit agreement to provide increased covenant cushion, and received a strategic investment from Stagwell Group, which the company will use to pay down its revolver balance and fund operating cash outflows, leading to a decline in adjusted leverage.
  • S&P Global Ratings believes MDC's business risk has weakened relative to its larger peers given the increased competitive dynamics of the overall ad industry, yet this is somewhat offset by its recently improved credit metrics and liquidity.
  • We are affirming all of our ratings on MDC Partners, including the 'B' issuer credit rating and the 'B' issue-level rating on the senior unsecured notes.
  • The stable outlook reflects our expectation that MDC will continue to secure net new business wins and generate organic growth rates of between 2%-4% over the next 12 months, while keeping leverage in the low-5.0x area and free operating cash flow (FOCF) to debt above 5%. Our outlook also reflects our expectation that covenant cushions will remain above 15% on a sustained basis.
NEW YORK (S&P Global Ratings) April 18, 2019—S&P Global Ratings today took the rating actions listed above. MDC amended its credit agreement to allow for a higher covenant leverage limit (6.25x from 5.5x), while lowering the total revolver commitment to $250 million from $325 million. At the same time, the company received a $100 million strategic investment from the Stagwell Group and sold its interest in Kingsdale Advisors for $23 million in cash plus a reduction in its remaining noncontrolling interest liabilities. The company will use these cash proceeds to pay down its revolver balance and for operating cash outflows. As a result, we expect adjusted leverage to decline to the low-5.0x area and covenant cushion to remain above 15% over the next 12 months.
The stable outlook reflects our expectation that MDC will generate organic growth of between 2%–4% over the next 12 months while keeping leverage in the low 5.0x and FOCF to debt above 5%. It also reflects our expectation that covenant cushions will remain above 15%.
We could lower our issuer credit rating if operating performance weakens such that the company's adjusted leverage rises to the high-5.0x area, discretionary cash flow (DCF) to debt declines below 5%, and/or covenant cushion declines below 10% on a sustained basis. This could occur if the company's current trend of positive net new business wins reverses, and/or the company's operating cash uses--through working capital or otherwise--drains excess cash flow, forcing a draw on the revolving facility to fund fixed charges beyond seasonal expectations.
We could raise our ratings if the company is able to reduce leverage below the mid-4.0x area while generating DCF to debt of at least 10% on a sustained basis. In any upgrade scenario, we would expect leverage reduction to be driven primarily by a combination of both consistent organic growth and debt reduction.
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