Is WPP at Risk of Breaching Its Debt Obligations?

George Parker recently suggested that WPP was at risk of screwing up its debt obligations: “Reports out of Europe suggest that WPP could breach its debt covenants in the first half of next year if the ad environment continues to worsen,” he said. The reason, Parker argued, is that the network is overburdened following its $1.9 billion acquisition of TNS and downward pressure on revenues caused by the recession.

While there are certainly reasons to wonder whether spending $1.9 billion in front of the worst cash crisis since the 1970s was a wise move, WPP is not in danger of defaulting or requiring some kind of dramatic refinancing next year. 2010, however, is a different story.

There are reasons Parker is hearing rumors about WPP’s debt. There’s certainly more of it than there used to be. Fitch downgraded WPP’s credit status in November following the TNS buy. BNET noted at the time that the ratings agency suggested WPP cut jobs to balance the debt; and Sorrell said recently that is exactly what he is going to do.

At this point, the big worry for WPP agencies is not whether they are generating enough cashflow to cover the payments. Rather, the key concern is Ford: That company accounts for 10 percent of all WPP’s revenues, and although Ford is in slightly better shape than GM and Chrylser, that’s a bit like saying that the Andrea Doria is in slightly better shape than the Titanic. A quick look at Ford’s debt picture shows you that cuts indeed are coming to that client’s ad budgets.

WPP is currently forecasting a 3 percent decine in adspend across the board for 2009, but WPP’s 10 percent exposure to Ford suggests that WPP itself may see a greater than 3 percent cut (Ford already cut 37 percent of its budget in 2008 alone). So there are reasons to be curious about how WPP will pay its obligations.

That, however, is speculation. There’s some solid information about WPP’s debt, and it’s reasonably positive.

• WPP’s Debt Schedule:
• £200 million is due in 2009
• £850 million is due in 2010
• £200 million is due in 2011
• WPP’s access to cash:
• £505 million in net cash on hand
• £759 million in undrawn committed credit lines

That doesn’t count future net cash flow. Note that the real crushing pressure on WPP’s payments will come not in 2009, but in 2010. That’s why Sorrell has been so upbeat about the “real” economy recovering by then. It has to … or he’s screwed.

In the meantime, “Fitch expects these maturities to be met by a combination of free cash flow generation, existing net cash … and undrawn committed borrowing facilities.”