Fitch Cuts WPP's Debt Rating; Suggests Pay Reductions

Fitch, the financial company that rates the ability of companies to pay back the debt they’ve taken on, has downgraded WPP from BBB+ to BBB. Here are the plain-English reasons why, and what it means for folks employed at WPP shops:

• The action reflects Fitch’s concerns over a protracted consumer-led economic recession and a substantial slowdown in advertising spending that is likely to weaken revenues and operating margins.
• [WPP's] balance sheet is already extended.
• The [move] reflects some headroom for further deterioration in Fitch’s expectations.

The downgrade reflects WPP boss Martin Sorrell’s gloomy assessment of his business, given on his earnings call a few days ago. The agency network has already gone into cash-hoarding mode by reducing its stock dividend. Sorrell doesn’t think normalcy will return until 2010. But it’s not all bad news:

WPP’s high revenue contribution from emerging markets, and improved business mix towards the less-cyclical marketing services and its proven ability to cut costs will likely support a more resilient performance than in previous downturns.

Interestingly, Fitch notes that it is the above-the-line, traditional agency work that is most risky, and that WPP is increasingly a non-advertising business:

While WPP’s revenues are driven by the advertising industry to a large degree, its overall revenue mix is likely to be more robust than the media spend on advertising, which is the figure typically quoted by the industry for the ‘advertising market’. Adjusted for the TNS acquisition, WPP’s more cyclical businesses — advertising, and media & investment management — will make up only approximately 40% of group revenues. The remainder 60%, which includes TNS, is the more stable information, insight and consultancy, public relations and public affairs, and branding, healthcare and specialist communications sectors.

There is, however, reason to be fearful if you’re a WPP employee, particularly on the agency side. Fitch says WPP may need to cut compensation in order to maintain its credit status:

Fitch also notes a number of mitigating factors to any revenue downside. These include WPP’s high percentage of variable employee remuneration (i.e. consultant, incentive compensation) at an estimated 7% of revenues; its proven ability to cut costs during economic downturns.