MDC Partners Inc. -- Moody's assigns B3 rating to MDC Partners new senior unsecured note and affirms existing ratings

New York, December 07, 2012 -- Moody's Investors Service (Moody's) assigned a B3 rating to MDC Partners Inc.'s (MDC) new $80 million senior unsecured note and affirmed the existing ratings. The Corporate Family Rating (CFR) and Probability of Default Rating (PDR) was affirmed at B2 and the existing $345 million senior unsecured note was affirmed at B3. The outlook remains stable.

The $80 million senior unsecured note is expected to be issued at a premium and have identical terms to the existing senior unsecured notes that mature in 2016. We expect the proceeds and cash on hand to be used to paydown the revolving credit facility which has $124 million drawn currently. While the terms are expected to be the same as the existing note, it will trade separately. After one year we anticipate that it will be consolidated into the existing note issue.

Rating Summary:

..Issuer: MDC Partners Inc.

....$80 million Senior Unsecured Note due November 2016 assigned B3 LGD4 -- 66%

Corporate Family Rating B2 affirmed

Probability of Default Rating B2 affirmed

....$345 million Senior Unsecured Note due November 2016 B3 affirmed; LGD4 -- 66% updated from LGD4 -68%

....Outlook, remains stable

RATINGS RATIONALE

The B2 CFR reflects MDC's high leverage level (7.7x as of Q3 2012 including Moody's standard adjustments and including deferred acquisition consideration and minority interest puts as debt), the company's aggressive acquisition strategy, and its sensitivity to consumer spending that leads to above average risk. The rating also reflects its smaller scale and low EBITDA margins compared to its larger competitors. Dividend payments of over $17 million annually and its aggressive acquisition strategy which has been financed with upfront payments in addition to contingent deferred acquisition consideration payments, limit its liquidity position. While Moody's base case scenario has leverage improving in 2013 as the level of investments decline, cost cutting initiatives are carried out, and revenue grows, the additional long term debt positions the company weakly at the existing rating level. Management has stated its goal of decreasing leverage, but the company has targeted deleveraging previously. MDC's leverage covenant calculation does not include items such as contingent deferred acquisition payments or minority interest puts and includes substantial add backs for stock based compensation.

After three acquisitions in the beginning of 2012, we expect limited acquisition activity in the near term as the company focuses on optimizing the company's existing assets. However, over time we expect more acquisitions to address client needs internationally and domestically. The company benefits from strong organic revenue growth, a focus on digital advertising, and improvements in diversifying its revenue stream which has lessened its dependence on any one key client compared to prior years. If the company is able to minimize acquisitions and grow organically, the leverage and liquidity position would improve as the deferred acquisition payments are paid down over the next several years.

The liquidity position is adequate as indicated by its SGL-3 rating. Reoccurring acquisition consideration payments and minority equity put rights which effectively act as short term debt, limit its liquidity position and make the company reliant on its revolver facility. The current portion of deferred acquisition consideration is $83 million and the long term portion is $86 million as of Q3 2012. The company is currently in compliance with its financial covenants. As the existing credit agreement for the revolver has been modified several times, we do not expect that the company would have a problem getting an additional amendment if needed unless there was a material deterioration in performance or economic conditions. The company could benefit from working capital improvements as part of its recent acquisition of media companies, but reliance on this source for liquidity could be problematic in an economic downturn.

The outlook is stable reflecting our expectation for leverage to improve as revenue grows, acquisition consideration payments are made, investment spending subsides, and efforts to cut costs and realize efficiencies lead to improved margin levels. However, a material deterioration in ad spending due to an economic downturn or poor operational performance that impacted earnings would put pressure on the current ratings levels.

Given the downgrade in June 2012 and the addition of $80 million in long term debt, a positive rating action is not expected in the near future. Positive rating pressure could develop if leverage declines to less than 4x (including Moody's adjustments) on a sustained basis, acquisition consideration payments and put rights decline materially, free cash flow as a percentage of debt improves to over 10%, and the company maintains a good liquidity position with a less aggressive financial policy.

The rating would be downgraded if the company fails to grow EBITDA so that leverage does not decline below 7.25x (including Moody's adjustments) by the end of 2013 and start to generate positive free cash flow after acquisition consideration payments, minority interest puts and dividend payments.

MDC Partners' ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside MDC Partners' core industry and believes MDC Partners' ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

MDC Partners Inc. (MDC) is a marketing communications and consulting services holding company that provides advertising, interactive marketing, direct marketing, database and customer relationship management, sales promotion, corporate communications, market research, corporate identity, design and branding and other related services. Crispin Porter + Bogusky (Crispin Porter) and kirshenbaum bond senecal + partners (kirshenbaum bond) are MDC's two largest agencies. Revenue as of Q3 2012 was $1.024 billion.

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Scott Van den Bosch Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653John Diaz MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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