WPP Is at "the Brink of Junk," Says Moody's; Sorrell Pushing Debt Envelope

Moody's cut WPP's debt rating to "the brink of junk," according to Dow Jones. The FT said WPP "teeters" above junk status. The news will doubtless be greeted by gales of laughter at Adscam.

More seriously, it marks something of an inflection point for WPP and its agencies, such as Ogilvy & Mather and JWT. With the acquisition of TNS, CEO Martin Sorrell has stretched his creditworthiness to the absolute limit in an ambitious bet that now is the agency's darkest hour -- and there is only light ahead.

Moody's agrees with that notion, which is why the current rating of Baa3 is also ranked "stable." But, the ratings service warned, per the FT:

A stable rating outlook reflects Moody's expectation that cost management steps taken by the company should be more effective in shielding profits from the full weight of the ongoing revenue decline compared to the first half of 2009...

Moody's said any indication that these targets were not being met could lead to a further downgrade.

WPP has Â£8 billion in current assets, of which Â£1 billion is cash. Its net debt is Â£3.5 billion. Virtually none of that debt is due this year or next. But merely financing the existing debt costs Â£90 million a year. More importantly, advertising must absolutely rebound by 2014 when $1.2 billion comes due.

So, Sorrell has plenty of time to maneuver, but not much room to maneuver in.

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