DBRS Confirms Yellow Pages Income Fund at STA-2 (high)

DBRS has today confirmed the stability rating of Yellow Pages Income Fund (Yellow Pages or the Fund) at STA-2 (high). The rating was downgraded in May 2009 when the Fund elected to reduce its distribution from $1.17 per unit annualized to $0.80 in order for YPG Holdings Inc. (YPG) to strengthen its financial flexibility.

The stability rating remains underpinned by the following:

(1) YPG’s leading position as the incumbent print and online directory company in Canada, servicing more than 405,000 local small and medium-sized customers across the country, along with its leading position as a national vertical media producer, with 160 publications covering automotive, real estate and other verticals.

(2) Industry-leading EBITDA margins in its largest segment, Directories, of 59% and approximately 55% overall.

(3) High free cash flow conversion rates (80% of EBITDA before distributions, 19% including distributions).

(4) An improving financial risk profile.

(5) A very manageable payout ratio of 68%, which is likely to decline further with stable per-unit distribution.

Cash flow from operations declined modestly to $771 million in the last 12 months (LTM) ending September 30, 2009, largely as a result of the cyclical pressure on YPG’s Vertical Media segment, while Directories remained stable. This cash flow from operations was more than ample to cover lower distributions of $557 million, which in turn drove higher free cash flow, allowing YPG to reduce its debt levels and leverage.

For 2010, DBRS notes that the Fund is targeting a lower growth rate in cash flow available for distributions of 1% to 3%, as opposed to previous years, when it was in the upper single digits, given its caution on the economic recovery that has notably affected its Vertical Media segment. DBRS believes that YPG could add to this growth rate with small strategic tuck-in acquisitions.

The Fund indicated in May 2009 that a payout of between 60% and 70% of cash earnings per share is its new preliminary target payout range as a corporation. DBRS notes that YPG feels that this range and the additional financial flexibility from its reduced distribution will allow it to better manage the transition of becoming taxable as a corporation. DBRS believes that the Fund and YPG will continue to examine their options, including the timing of conversion, which is expected on or before January 1, 2011. DBRS notes that taxes accrued in 2011 under a corporate structure will begin to be paid in 2012.

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

The applicable methodology is Rating Media and Entertainment, which can be found on our website under Methodologies.

This is a Corporate (Telecom/Media/Technology) rating.