IPG's GM Bankruptcy Credit Line Explained

Interpublic's change to its credit availability if General Motors goes bankrupt is disconcerting, coming in the wake of news that Chrysler has left BBDO on the hook for $58 million.

The way IPG paints it, the move is merely precautionary and doesn't really affect the agency. Looked at another way, however, you can see CEO Michael Roth -- and Wall Street -- are sketching out a worst-case scenario.

The credit agreement gives IPG access to $335 million over a three-year period, if it needs it. The agency network doesn't actually draw on the line, it says. The change that has been made to the agreement basically says, "If GM collapses the bank will ignore some of those losses instead of ending the credit facility."

So ... nothing to worry about, right?

Not so fast. IPG goes on to say that it does use the existence of the line to undertake other types of financing:

... it uses them to obtain letters of credit to support commitments on behalf of certain clients.

This suggests to me that "certain clients" want IPG to prepay bills ahead of time, and that the client will repay IPG later. Media-buying often works like this. With Chrysler and GM either in or flirting with bankruptcy, TV networks might want to know whether IPG is actually able to make good on the orders it places. This issue (whether the client pays or the agency pays) is called "sequential liability" -- the notion that agency vendors won't get paid unless the client pays the agency first. Wall Street analysts asked Roth about that in their last conference call:

Benjamin Swinburne, Morgan Stanley & Co.: I don't know if you would be willing to comment about any changes you're making to payment terms or how you're attacking sequential liability concerns as you move through the year?
CFO Mr. Frank Mergenthaler: On the payment terms, it's a topic that becomes more front and center. Clients are constantly trying to adjust payment terms. We have been very disciplined in holding to the existing terms of the contractual arrangements. We are very aggressive with respect to payments that go beyond terms. I think that the teams around the globe have done a good job in making sure we collect according to the terms.
Sequential liability is something that was not at the forefront of client discussions. It is now and we got sequential liability with a number of key vendors, and some vendors we don't. It's an area we are going to try and push very hard for, because we feel strongly about it when we are acting as an agent opposed to a principal. But in today's environment, everybody is very much aware of the liquidity concerns out there, so everybody is fighting for their cash protection.

Just to edit that down: "Clients are constantly trying to adjust payment terms ... we got sequential liability with a number of vendors and some vendors we don't."

This suggests to me that IPG wanted its credit line to become more flexible precisely because "certain clients" (as mentioned in its credit note) are not playing ball. BNET explained why agencies are historically unable to enforce payment terms with their clients yesterday.

Now put that together with what Wall Street wanted to know about how a GM bankruptcy would affect IPG in a "worst-case scenario." As BNET noted on April 29, IPG's "cash impact" exposure is $150 million (three times BBDO's current problem) and, as Adweek points out, GM is 13 percent of IPG's business.

So this flexible credit line is looking a bit more important, right? Especially as in its current unused state it isn't factored into IPG's debt repayment schedule. Here's what IPG owes in the near future:

$327 million due this year
$250 million due in 2010
$500 million due in 2011

This is the only good news coming out of IPG's recent filings -- if GM does bilk IPG out of its billings, then it will be during a period in which IPG's debt picture improves significantly. But after that, in 2011, Roth had better pray that the recovery comes and his network rides the incoming tide -- because his debt doubles that year.

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