DBRS Downgrades Yellow Media’s Ratings, Trend Remains Negative

DBRS has today downgraded the ratings of Yellow Media Inc. (Yellow Media or the Company), including the Medium-Term Notes to BB from BBB, its Exchangeable Subordinated Debentures to B (high) from BBB (low) and its Commercial Paper to R-4 from R-2 (high). The trends remain Negative. As part of our leveraged finance rating methodology, DBRS has also assigned an Issuer Rating of BB to Yellow Media and a recovery rating of RR4 to the Medium-Term Notes (indicating expected recovery of 30% to 50%) and an RR6 to the Exchangeable Subordinated Debentures (indicating expected recovery of 0% to 10%).

The downgrade reflects increased concern regarding the timing, execution and success of Yellow Media’s transition from print to digital and a meaningful reduction of the Company’s financial flexibility. DBRS notes that as part of Yellow Media’s goodwill impairment testing that was announced today, the Company indicated that EBITDA will be pressured as a result of the accelerated transition from print to digital, which raises uncertainty regarding the timing and ability of digital to offset the ongoing pressure on print. The uncertainty and lack of visibility around the Company’s progress on this transition continue to mount. As a result, DBRS expects revenue and EBITDA could be meaningfully less than DBRS had previously anticipated.

Secondly, DBRS believes Yellow Media’s financial flexibility and liquidity have been significantly reduced despite completing $700 million of debt reduction in Q3 2011 (gross debt-to-EBITDA was approximately 3.0 times at June 30, 2011). This is reflected by the fact that the Company’s credit facility was reduced from $1 billion to $500 million, while maintaining a February 2013 maturity, and that it has reduced access to the capital markets with a significantly higher cost of capital.

DBRS notes that these factors have accelerated since DBRS’s previous downgrade on August 4, 2011, which included changing the trend to Negative from Stable. As such, the Company’s credit risk profile is no longer consistent with an investment-grade credit rating. The Negative trend on August 4, 2011, reflected risks associated with executing the digital transition, generating reasonable levels of EBITDA and cash flow from operations and maintaining an adequate level of financial flexibility.

Today’s action follows Yellow Media’s announcement that a non-cash goodwill impairment charge of $2.9 billion will be taken in Q3 2011; that its common dividend will be eliminated following its October 17, 2011, payment; and that it will be making a number of amendments to its credit facility, including reducing it to $500 million.

The Negative trend reflects the following: (1) heightened uncertainty surrounding Yellow Media’s business profile as print pressure accelerates and the timing and scale of digital growth remain unknown; (2) concerns related to the execution of its digital strategy; (3) DBRS’s concern that the transforming businesses’ income and the capacity to generate cash flow from operations may not be sufficient to support Yellow Media’s evolving capital structure; and (4) the Company’s reduced ability in terms of financial flexibility to manage through this transition.

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

The applicable methodology is Rating the Newspaper and Magazine Publishing Industry and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.