DBRS Confirms Yellow Pages Income Fund at STA-1 (low)

Dominion Bond Rating Service (DBRS) has today confirmed the stability rating for Yellow Pages Income Fund (Yellow Pages or the Fund) at STA-1 (low). The stability rating is supported by the Fund’s (1) leading position as the incumbent directory operator in markets covering 97% of the Canadian population; (2) EBITDA margins over 50%, demonstrating the pricing power and value proposition to customers; (3) predictable cash flow from operations, which are less affected than other media from economic and advertising cycles; (4) low capital expenditure requirements (~3% of revenue), which facilitates a high conversion from cash flow from operations to cash flow available for distributions; and (5) reasonable payout ratio, currently below 90%, which allows for financial flexibility.

DBRS notes the Fund has completed four acquisitions over the last 18 months for a total consideration of $4.0 billion (debt and equity), resulting in a virtually nationwide directories and verticals platform. As a result, the Fund should be able to maintain its pricing power and protect its industry-leading EBITDA margins in the near term.

Yellow Pages enjoys high barriers to entry for direct print competition; hence, DBRS does not expect existing print competitors to gain significant incremental share given Yellow Pages’ high return on investment for customers and the reach of its directories. However, meaningful advertising substitutes do exist for local advertisers, such as community newspapers, direct mail, radio, websites and third-party websites, such as search engines. More importantly, DBRS believes it is inevitable over the long term that demand for local search, such as directories, will shift away from print media to non-print media. As such, it is critical that Yellow Pages be at the forefront of these trends by transitioning existing users to digital platforms that Yellow Pages owns in order to protect earnings. Accordingly, Yellow Pages has increased its focus on electronic advertising through cross-selling onto its websites and other products such as HelloYellowTM (aimed at mobile telephony segment). Moreover, the Fund has signed partnerships with leading Internet portals that should help act as a defensive mechanism and drive traffic to Yellow Pages’ online assets.

DBRS notes that while recent acquisitions have increased the Fund’s size and solidified its dominance, it has come at the cost of higher debt levels at YPG Holdings Inc. Despite this pressure, current distributions to unitholders benefit from the continued strength of the Yellow Pages franchise with the payout ratio below 90%, which provides for some event risk. DBRS notes that if the payout ratio were to increase materially, the potential could exist to review the current STA-1 (low) rating.

Note:
All figures are in Canadian dollars unless otherwise noted.