Fitch Affirms & Removes Interpublic's 'B+' Rating from Watch Negative.

CHICAGO -- Fitch Ratings has affirmed and removed Interpublic Group (IPG) from Rating Watch Negative as follows:

-- Issuer default rating (IDR) 'B+';

-- Senior unsecured credit facility 'B+';

-- Senior unsecured notes 'B+'.

Fitch has also assigned an 'R4' recovery rating to IPG, who were originally placed on Rating Watch Negative on March 11, 2005. The Rating Outlook is Stable. Approximately $2.2 billion in debt securities are affected by this action.

The ratings continue to reflect weak financial performance which has been driven by numerous accounting and operational challenges, continued integration issues from the company's restructuring initiatives which has included major management changes, the ongoing material weaknesses and internal control issues which have yet to be remedied, and ongoing risk of client losses. These risks are balanced against IPG's position in the industry as a leading global advertising holding company, and its diverse client base with long term relationships with key accounts. Also, the strides that the management team has made on its key initiatives of strengthening the balance sheet, improving financial flexibility, the reliability of IPG's financial reporting, and the benefits the company should receive from the attractions of new talent to its agencies despite the associated high compensation costs are viewed favorably.

The Stable Rating Outlook reflects Fitch's belief that IPG has some additional room for operational shortfall within its rating category. Fitch believes that credit metrics will be strained through the remainder of 2005, but should improve thereafter. The Stable Outlook is also supported by adequate financial flexibility as IPG has demonstrated continued access to the capital markets during this period of financial stress. IPG amended and renewed its $450 million bank credit facility retaining all ten banks in its previous syndicate. IPG also issued $250 million senior unsecured notes in July 2005 to redeem its $250 million notes due October 2005. IPG spends between $150-200 million on capital expenditures, but much of that is believed to be discretionary and available as necessary. IPG has minimal debt maturities in 2006 and 2007.

Fitch downgraded IPG to 'B+' from 'BB+' and placed the company on Rating Watch Negative in March 2005 due to significant negative event risk associated with its announcement that it would postpone filing of its financial statements with the SEC. At that time, IPG was in the process of receiving waivers and amendments to its credit facilities and indentures due to the breach of its timely filing covenant. Additional concerns related to reliability of IPG's financial reporting, the ability of the company's auditors to provide an 'unqualified' opinion about the company's financial reports and internal controls, IPG's earnings and cash flow outlook, given the company's weak organic growth trends, significant pressures on operating margins, and the impending October 2005 debt maturity.

During the period of uncertainty following this announcement, IPG has lost several high profile clients (albeit predominantly lower margin media buying clients), namely, GM, Bank of America, L'Oreal and Lowe's. High profile client losses represent less than 2% of 2004 revenue. While client losses are inherent in the advertising business, Fitch believes client losses highlight increased operational risk stemming at least in part from IPG's inability to file audited financial statements in a timely fashion. Fitch also believes this risk is somewhat diminished with the filing of the statements.

In addition, IPG has expended a significant amount on legal, accounting and other professional fees in order to remediate the unreliability and inaccuracies in its financial reporting. These fees are expected to increase significantly in 2005 and decrease but remain high in 2006. At the same time, salary and related costs have escalated, up from 56% of revenue in 2003 to approximately 65% of revenue at June 30, 2005. Management has focused on attracting talent to help offset its financial reporting issues and enhance its financial practices and help deliver its goals of stabilizing the business trends and deliver revenue growth and margin enhancement in future periods. These elevated cost levels, the majority of which will be absorbed in 2005 and 2006, have introduced a degree of financial risk that was not present prior to IPG's financial reporting challenges. IPG's restatement was material and resulted in a charge to equity of $550 million reducing equity approximately 25%. The restatement also included a material cash charge of $250 million, primarily related to inappropriate accounting for vendor credits in international operations.

By filing its financial statements and renewing its credit facility Fitch believes that negative event risk has diminished but recognizes challenges still exist as it relates to a pending SEC investigation, remediation of its internal control weaknesses, potential shareholder lawsuits In addition, heightened operational risk, financial risk and execution risk will likely persist for over 12 months.

Operationally, IPG needs to generate organic growth more in line with its investment grade rated global advertising holding company peers (whose organic growth exceeded 4% in 2004 compared with 1.2% for IPG). Financial risk, in the form of depressed EBITDA levels, primarily associated with high professional fees will be reduced when the company reaches its run-rate professional fee levels in 2007; with professional fees expected to be significantly lower than in 2005. 2006 will see a reduction in professional fees but they will remain uncharacteristically high while the company pursues Sarbanes Oxley compliance. Having the financial reporting uncertainty in the past should reduce management distraction, however execution risk still remains due to the relatively new management team in place and the number of corporate initiatives they are addressing on the heels of the recent financial reporting difficulties.

IPG generated $242 million in free cash flow in 2004 but is expected to be roughly breakeven in 2005, due to high professional fees and related expenses. Fitch believes a significant proportion of capital expenditures are discretionary and could be directed toward debt repayment. Cash balances have been maintained at healthy levels of over $1.5 billion, however Fitch recognizes that payables (and accrued liabilities) exceed receivables (and expenditures due to clients) by over $1.7 billion at June 30, 2005 reducing the availability of cash balances in a liquidity event. Internally generated liquidity is supplemented by IPG's $450 million revolving credit facility, which was fully available at June 30, 2005. Revised financial covenants, namely, minimum interest coverage ratio, debt to EBITDA and minimum EBITDA provide room for credit metrics to deteriorate through LTM June 30, 2006 when levels are 1.45x, 6.65x and $340 million, respectively. In 2008, IPG faces its first meaningful maturity when $250 million senior unsecured notes come due and its $800 million 4.5% convertible senior notes due 2023 are putable by the note holders for cash.

Leverage, defined as total adjusted debt to operating EBITDAR was 5.9x at Dec. 31, 2004. The measure is expected to rise above 7.5x for LTM Dec. 31, 2005, and decline sequentially to under 6.0x in 2006 and to under 5.0x in 2007 when professional fees and the cost structure is expected to normalize. The rating or Outlook could be lowered if the company does not achieve anticipated reductions in leverage. In addition, IPG's ratings or Outlook could be lowered if the company does not stabilize and grow its revenue base, receives a material adverse judgment as part of its pending SEC investigation, or is not successful at reducing professional fees and enhancing margins as anticipated.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.