DBRS Downgrades Yellow Media’s Ratings, Trend Remains Negative

DBRS has today downgraded Yellow Media Inc.’s (Yellow Media or the Company) Issuer Rating to B (high) from BB; its Medium-Term Notes to B (high) from BB, with an RR4 recovery rating; its Exchangeable Subordinated Debentures to B (low) from B (high), with an RR6 recovery rating; and its Cumulative Preferred Shares to Pfd-5 (low) from Pfd-4 (low). The trend on all ratings remains Negative.

DBRS notes that Yellow Media’s unsecured debt continues to have average recovery prospects (RR4; 30% to 50% expected recovery), while its subordinated debt has poor recovery prospects (RR6; 0% to 10% expected recovery) under a base case default/recovery scenario.

Today’s downgrade reflects recent actions taken by Yellow Media that may indicate that its business transformation may take longer than previously anticipated, while its debt maturities over the medium term remain significant. DBRS believes that this may greatly restrict the Company’s ability to handle its maturing debt by means of internally generated free cash flow and, potentially, by drawing on external sources. DBRS notes that Yellow Media has sizable and relatively steady debt maturities over the 2013 to 2016 time frame (during which 65% of its $1.8 billion total gross debt at December 31, 2011, matures, or nearly 70% of its roughly $2.0 billion of total gross debt on a pro forma basis to February 9, 2012). DBRS believes that these factors are no longer consistent with an Issuer Rating in the BB range.

In its Q4 2011 earnings statement released on February 9, 2012, Yellow Media announced that it had: (1) formed a committee of the board of directors to evaluate alternatives to refinance its upcoming maturities; (2) drawn $239 million of its $250 million revolving credit facility in Q1 2012; and (3) suspended the dividend on its outstanding preferred shares, thereby saving roughly $40 million in preferred dividends per year.

Yellow Media has indicated that its financing committee is expected to evaluate a broad range of alternatives to refinance its maturities in 2012 and beyond, with a goal of completing a transaction (or transactions) within the current year. While the precise nature of this activity is not known at this stage, DBRS notes that it would take a negative view of any transaction or transactions leading to a compromise for the Company’s existing creditors. DBRS also notes that drawing on its revolving credit facility precludes Yellow Media from repurchasing up to $125 million of its 2013 debt maturities in the open market, as would have been allowable under its September 2011 amended credit agreement.

The Negative trend reflects the possibility that Yellow Media’s ratings could be further downgraded should the Company undertake refinancing actions that would entail some form of compromise for its existing creditors. Additionally, DBRS remains concerned that the digital transition may continue to take longer than currently anticipated and could include (1) accelerated pressure on Yellow Media’s traditional print business while digital revenue continues to grow but fails to compensate for print revenue pressure; and (2) further pressure on liquidity and free cash flow, rendering it insufficient to handle the Company’s sizable upcoming debt maturities.

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

The applicable methodologies are DBRS Criteria: Rating Leveraged Finance and Rating the Newspaper and Magazine Publishing Industry, which can be found on our website under Methodologies.