DBRS Assigns Yellow Media Limited an Issuer Rating of B (low), Stable Trend

DBRS has today assigned an Issuer Rating of B (low) to Yellow Media Limited (Yellow Media or the Company) and security ratings of CCC (high)/RR5 to YPG Financing Inc.’s Senior Secured Notes and CCC/RR6 to YPG Financing Inc.’s Subordinated Exchangeable Debentures. The trends are Stable. The ratings reflect the continuing erosion of print revenue as consumers shift toward alternative forms of advertising, concerns regarding the Company’s ability to grow its online services and the significant debt burden that remains subsequent to the Company’s restructuring. That said, Yellow Media’s print business is still expected to generate free cash flow over the near term, the majority of which DBRS expects will be directed toward debt reduction.

Yellow Media’s earnings profile has been structurally affected by a consumer shift toward digital forms of advertising as the Company has struggled to sustain organic revenues and operating income in its core print business. Over the past few years, Yellow Media has been experiencing sharp declines in print revenues and operating profits as both business customers and end users find the Company’s print product less attractive in an increasingly digital advertising market. In terms of financial profile, the Company’s capital structure was recapitalized near the end of 2012, given the lack of refinancing options available. As a result of the transaction, the Company was able to reduce its long-term debt obligations by approximately $1.5 billion. Specifically, $1.4 billion of medium-term notes, $370 million of borrowings under the Company’s credit facilities, $200 million of convertible debentures and $400 million of preferred shares were replaced with $800 million of Senior Secured Notes and $107.5 million of Subordinated Exchangeable Debentures, along with equity interests.

DBRS expects that Yellow Media’s earnings will continue to weaken substantially going forward as the Company’s print declines are likely to significantly outweigh online revenue growth. DBRS expects the Company’s print revenue (approximately two-thirds of total last 12 months revenue) to continue its trajectory of steady declines, falling significantly over the next few years. In regards to Yellow Media’s online revenue, average revenue per account (ARPA) gains and subscriber growth are inherently difficult to predict given the evolving nature of the Company’s strategy and product offerings, combined with a fragmented competitive environment with low barriers to entry. Operating margins are expected to decline substantially below their current 50% levels given the reduction of operating leverage in print combined with the lower profitability of the Company’s online operations.

In terms of the Company’s financial profile, DBRS expects further declines in earnings and free cash flow generation over the next few years due to continued erosion of the print business. Although the Company’s recapitalization significantly reduced debt levels, DBRS believes that Yellow Media’s financial leverage remains aggressive given the uncertainty surrounding the Company’s future prospects. That said, DBRS expects the Company to use free cash flow to reduce senior secured debt by approximately $200 million by the end of 2014. It should be noted that the Company’s Issuer Rating of B (low) incorporates at least this level of deleveraging within the stated time period.

The inability to deliver the aforementioned debt reduction and/or increasing pressure on earnings resulting from greater-than-expected declines in print and/or weaker-than-expected growth in digital could result in a negative rating action. DBRS believes that Yellow Media will require further debt reduction in 2015 and beyond in order to maintain a credit risk profile that is consistent with the current rating; however, the magnitude and pace of deleveraging beyond 2014 is difficult to predict due to the evolving nature of the Company’s businesses.

As Yellow Media’s Issuer Rating is assigned a rating of B (low) and is considered non-investment grade, the DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers methodology is applicable. Specifically, DBRS must assess the recovery prospects on specific debt securities for the purpose of establishing credit ratings on those respective debt securities. Under the liquidation approach, in a path to default over the medium-to-longer term, DBRS believes it is likely that holders of the Senior Secured Notes would likely recover between 10% to 30%, representing a recovery rating of RR5. Using a similar approach and time frame, holders of the Subordinated Exchangeable Debentures are likely to recover between 0% and 10% of their value, a level that corresponds with a recovery rating of RR6. In accordance with DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, DBRS has assigned a rating of CCC (high) to YPG Financing Inc.’s Senior Secured Notes (one notch below Yellow Media’s Issuer Rating of B (low)) and CCC to YPG Financing Inc.’s Subordinated Exchangeable Debentures (two notches below the Issuer Rating of B (low)).

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers and Rating the Newspaper and Magazine Publishing Industry, which can be found on our website under Methodologies.