December 6, 2012 / 9:40 PM / 5 years ago

TEXT-S&P rates MDC Partners unsecured note 'B'

Dec 6 - Standard & Poor's Ratings Services said today that it assigned MDC
Partners Inc.'s proposed $80 million add-on to the unsecured notes due
2016 an issue-level rating of 'B', with a recovery rating of '4', indicating our
expectation for average (30% to 50%) recovery for noteholders in the event of
default. The company plans to use proceeds to pay down its revolving credit
facility and for general corporate purposes.

Under our base-case scenario, we expect that leverage (including our 
adjustments for operating leases, earn-outs, and put obligations) could remain 
well above 4x through at least 2013. As a result, over the next 12 to 18 
months, we expect to continue to characterize the company's financial risk 
profile as "highly leveraged," which includes leverage in the 4x to 5x range, 
based on our criteria. Elevated financial risk, together with continued 
economic uncertainty and our "fair" assessment of the company's business risk 
profile, are key considerations in the 'B' rating. Our governance assessment 
is fair.

Pro forma for the note offering, lease-adjusted debt (including deferred 
acquisition consideration and put obligations) to EBITDA (before noncash stock 
compensation, including affiliate distributions and adjustments for deferred 
acquisition consideration, but after minority interest) was very high, at 
roughly 8x as of Sept. 30, 2012, up from 6x in 2011. The spike in leverage was 
because of EBITDA declines, as well as borrowings under the revolving credit 
facility to fund deferred acquisition consideration payments in 2012. Typical 
of the industry, consideration for MDC's acquisitions is usually structure as 
an upfront portion, often at PBT (profit before tax) multiples of 3x to 4x, 
with additional consideration in the form of contingent deferred acquisition 
payments. To date, these payments have been lumpy, limiting the company's 
liquidity position in certain periods and causing the need for credit 
amendments to loosen financial covenants. As of Sept. 30, 2012, the current 
portion of deferred acquisition consideration was $82.7 million or roughly 76% 
of EBITDA. Although high, MDC should be able to address this payment with a 
combination of revolver borrowings given the increase in availability from 
this transaction and free cash flow. 

Under our base-case scenario, we believe that leverage could fall to the mid- 
to high-5x area in 2012. In 2013, assuming the company pays the current 
portion of earn-out obligations, we believe leverage could drop to the mid-4x 
area. Further leverage reduction will depend on the pace of EBITDA recovery, 
as well as future acquisition activity and the ongoing level of 
acquisition-related liabilities, which we have assumed will be in the $40 
million to $50 million range longer term. Discretionary cash flow (operating 
cash flow, less capital expenditures and after dividends and minority 
distributions) was negative for the 12 months ended Sept. 30, 2012, mainly 
because of EBITDA declines, high dividend payments, and working capital cash 
usage as a result of acquisition activity. Due to EBITDA growth and working 
capital benefits of media-related acquisitions in the first half of the year, 
we expect discretionary cash flow to be positive in the fourth quarter. As a 
result, under our base-case scenario, we believe the company could convert 
30%-40% of EBITDA to discretionary cash flow for the full-year 2012. A key 
rating factor will be the company's ability to generate ongoing positive 
discretionary cash flow, despite the level of acquisition activity. 

Our rating outlook is stable. The stable rating outlook reflects our 
expectation that MDC will generate positive discretionary cash flow for 2012 
and 2013, and that leverage will begin to decrease as EBITDA rebounds and 
talent-related spending subsides. Over the next year, we view both an upgrade 
and downgrade as equally unlikely. We could raise the rating over the long 
term, if leverage drops to less than 4x on a sustained basis, compliance with 
financial covenants remains above 20%, and the company maintains adequate 
liquidity and establishes a less aggressive financial policy. We believe the 
company could achieve these measures in 2014, assuming stronger economic 
trends, and barring a continuation of aggressive debt-financed acquisition 
activity. We expect such a scenario would entail continued mid- to 
high-single-digit percent organic revenue growth, and a steady reduction in 
deferred acquisition-related liabilities.

Conversely, although less likely in our view, we could lower the rating if the 
company does not begin to generate sustainable positive discretionary cash 
flow, or if covenant headroom falls below 15% with an expectation of further 
narrowing, stemming from operating weakness and acquisition or earn-out 
related payments.

     -- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 
1, 2012
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

MDC Partners Inc.
 Corporate Credit Rating          B/Stable/--

New Ratings

MDC Partners Inc.
 $80M unsecd nts*                 B
   Recovery Rating                4

*This is an add-on. New total is $420M

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 

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