25th May 2018

Advertising giant WPP has been in the headlines for the past few weeks following the departure of its long term CEO, Martin Sorrell.

Just this week, Ratings Agency Fitch downgraded the outlook on its bonds to negative, but kept its BBB+ (Investment Grade rating). Reasons Fitch gave for the change included:

  • Pressures building both across the industry and at WPP
  • Flat revenue outlook
  • Revision to margin expansion targets
  • Acknowledgement that debt levels are too high
  • Risk to WPP of being cut out by online advertising platforms
  • Pressure on advertising budgets
  • Strategic questions following the departure of Martin Sorrell, its long-time CEO, and uncertainties surrounding succession

We have been a close follower (but never an owner) of WPP’s 30 year sterling bond issued in September 2016. At the time, WPP successfully issued £400 million of 30 year bonds with a coupon of 2.875%, a remarkable achievement for the WPP Corporate Treasurer.

As we have pointed out in previous posts, Corporate Treasurers and their Syndicate Advisors carry the traits of excellent traders, based on their knack for issuing debt at the most opportune time. The WPP issuance was issued into the sweet spot following the vote on the Brexit referendum, after which the Bank of England announced its Corporate Bond Purchase Programme. WPP 2046 is an eligible bond for the Bank of England programme.

We would argue that many of the current problems at WPP could have been foreseen at the time of the new issue, namely:-

  • Potential CEO succession issues: Sir Martin Sorrell was over 70 when the bond was issued
  • Disruption in the Advertising Market – The advent of Facebook, Amazon, Instagram, Linkedin, YouTube and Netflix were already changing the way consumers interacted with advertising
  • Cyclical Industry – Advertising has traditionally been one of the first expenses to be cut from Corporate budgets ahead of a downturn

These are all factors that a desktop credit analysis of WPP should have revealed. So why did investors accept a 2.875% coupon at the time?

  • FTSE 100 Company with a sizeable market cap (~£22bn at the time)
  • Scarcity value of a Corporate Issuer in the Sterling Market
  • Sector diversification
  • Prospect of out-performance as the bond becomes eligible for the BoE Corporate Bond Purchase Programme

However, even the Bank of England could not prevent the rocky ride that bondholders in WPP 2046 have had to endure since the bonds were issued. The bond currently trades in the low 80s, yields circa 4% and at one point widened to 240bps over the benchmark gilt (it was issued at +160bps). The idea of Central Bank purchases holding up asset prices is getting more difficult, as demonstrated by the ECB, who were impacted by the severe fall in Steinhoff bonds and the the more recent weakness in Italian BTPs.

At Rubrics, we run global, non-benchmarked strategies meaning we do not ‘have to buy’ new issues and we are not limited to any single currency bond market such as the Sterling Market.

This, combined with our credit selection process, aims to reduce the risk of buying bonds with a high level of latent tail risk.

Sources: Bloomberg, Bank of England (https://www.bankofengland.co.uk/markets/quantitative-easing-and-the-asset-purchase-facility)


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