DBRS Notes YPG’s Corporate Conversion Plans Do Not Impact its Ratings, Notes Name Change

DBRS notes today that YPG Holdings Inc. has announced details that provide additional clarity on its conversion from an income trust to a corporation. As part of this conversion plan, YPG Holdings Inc., the corporate entity and debt issuer within the current structure, has been renamed Yellow Media Inc. (Yellow Media or the Company).

Yellow Media also announced that it will: (a) maintain its $0.80 per unit annual distribution to the end of 2010; (b) begin to pay an initial annual dividend of $0.65 per share in 2011, payable monthly; and (c) convert to a corporation by the end of 2010. While today’s announcement does not affect Yellow Media’s STA-2 (high) stability rating, DBRS plans to discontinue this rating upon Yellow Media’s conversion to a corporation.

Furthermore, DBRS notes that Yellow Media’s conversion, as described, is not expected to have any impact on its current R-1 (low), BBB (high), BBB and Pfd-3 (high) credit ratings. DBRS notes that its credit ratings remain supported by: (1) a manageable business risk profile to date, with Yellow Media’s Directories segment (more than 90% of EBITDA) exhibiting stable results, while cyclical pressure remains evident in its Vertical Media segment (less than 10% of EBITDA), and (2) the improvement in its financial risk profile, which has been a direct result of debt reduction efforts afforded by its reduced distribution rate in May 2009.

DBRS expects that as a corporation Yellow Media will generate good levels of normalized free cash flow starting in 2011 (DBRS estimates $100 million or more per year), while its lower initial payout level (roughly in the middle of its 60% to 70% target range communicated in May 2009) will help to mitigate the impact of cash taxes. The Company intends to raise the dividend as it acquires growth going forward.

Additionally, DBRS notes that since Yellow Media lowered its distribution in 2009, the Company has improved its financial risk profile by reducing leverage to end 2009 with debt-to-EBITDA of roughly 2.57 times, down from 2.91 times at the end of 2008. The Company also announced that it plans to continue deleveraging during this transitional period. Furthermore, DBRS notes that with the significant financing accomplished in 2009, Yellow Media has no significant maturities over the next three years (2010 to 2012) until 2013.

While reduced leverage helps to support Yellow Media’s financial risk profile, DBRS notes that its ratings are largely based on its business risk profile. While there are significant risks on the horizon as the Company repositions its businesses to adapt to an increasingly digital world, to date DBRS has seen no evidence that this transformation has materially changed the Company’s business risk profile – that is, it retains its leading position as the incumbent directory company across Canada, servicing more than 400,000 local small and medium-sized enterprises.

DBRS expects to continue to closely monitor Yellow Media’s digital transformation and vertical integration and the impact, if any, that this may have on its overall business risk profile. DBRS believes that (1) any resulting changes that negatively affect its advertisers, users, EBITDA and EBITDA margins and/or (2) large acquisitions that move Yellow Media away from its core business, could put pressure on the Company’s ratings in the future.

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.