DBRS Downgrades Yellow Media and Places It Under Review with Negative Implications

DBRS has today downgraded Yellow Media Inc.’s (Yellow Media or the Company) Issuer Rating to C (high) from CCC; its Medium-Term Notes rating to C (high) from CCC, with an RR4 recovery rating; and its Exchangeable Subordinated Debentures rating to C (low) from CC (high), with a recovery rating of RR6. DBRS has also placed these ratings and Yellow Media’s Cumulative Preferred Shares rating of Pfd-5 (low) (already at the lowest rating on the scale) Under Review with Negative Implications.

The downgrade follows the Company’s announcement of a recapitalization plan (the Recapitalization), which is intended to restructure the balance sheet in a manner that would better enable Yellow Media to focus on the transformation of its business from print to digital. DBRS notes the recapitalization proposal (see key components below) would result in a default, based on the fact that lenders would receive less than originally intended interest and principal repayment if the offer is approved in a vote on September 6, 2012.

The revised ratings have been placed Under Review with Negative Implications in consideration of the pending stakeholder vote on September 6, 2012. Should the proposal be approved, Yellow Media’s exchanged securities would be placed in default status in accordance with DBRS policy.

The key components of the plan are as follows:

Exchange of Yellow Media’s credit facilities and medium-term notes (the Senior Unsecured Debt), representing $1.8 billion of the Company’s debt, for a combination of:
-- $750 million of 9% Senior Secured Notes due in 2018;
-- $100 million of Subordinated Unsecured Exchangeable Debentures due in 2022, with interest payable in cash at 8.0% or in additional debentures at 12%;
-- 82.5% of the New Common Shares; and
-- $250 million of cash.

Holders of existing convertible debentures, preferred shares and common shares of the Company are to receive in exchange for their securities a combination of:
-- 17.5% of the New Common Shares; and
-- Warrants, representing in the aggregate 10% of the New Common Shares.

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.