DBRS Upgrades Yellow Pages and Yellow Pages Digital & Media Solutions, Stable Trends

DBRS Limited (DBRS) has today upgraded the Issuer Rating of Yellow Pages Limited (Yellow Pages or the Company) to B (high) from B. DBRS has also upgraded the Senior Secured Notes rating of Yellow Pages Digital & Media Solutions Limited (Yellow Pages Digital) to BB (low) from B (high) with a recovery rating of RR3, as well as its Subordinated Exchangeable Debentures rating to B (low) from CCC (high) with a recovery rating of RR6, based on the upgrade of the Company’s Issuer Rating. All the trends are Stable.

The rating upgrades reflect continued progress made by the Company since the last update in the execution of its digital transformation strategy (introduced in May 2014), including steady and meaningful growth in digital revenues, the corresponding realignment the cost structure and continued financial deleveraging. The ratings continue to incorporate a gradual erosion of the print business as customers shift to alternative forms of digital advertising.

On August 28, 2015, DBRS upgraded Yellow Pages’ ratings and maintained the Positive trends, indicating that, if digital revenues continued to grow in the mid- to high-single digits and gross debt-to-EBITDA remained below 2.5 times (x) in the subsequent year, a positive rating action could result. Since then, organic digital revenues rose by 7% in H1 2016 over the comparable prior-year period and by 6% year over year in 2015. This sound growth was supported by healthy customer acquisition and digital renewal rates, which minimized overall declines in customer counts. Furthermore, the Company completed two strategic acquisitions which bolstered digital revenues further. As expected, print revenues declined by 22.8% in H1 2016. As such, consolidated revenue was $833 million in the last 12 months (LTM) ended Q2 2016 compared with $878 million in 2014. EBITDA was $249 million in the LTM ended Q2 2016 compared with $316 million in 2014, as expected, because of the top-line declines and lower-margin profile of the digital business. Due to the low capital intensity of print and digital businesses, the free cash flow profile remains strong, and the Company continued to direct free cash flow toward mandatory debt repayments. Gross debt declined to $462 million as at June 30, 2016, and credit metrics strengthened through the LTM ended Q2 2016 (gross debt-to-EBITDA of 1.86x, free cash flow-to-debt of 24% and EBITDA interest coverage of 5.14x).

Yellow Pages’ earnings profile is expected to remain stable over the medium term as the Company continues to focus on growing its digital solutions business as well as integrating and driving margin contributions from recent acquisitions. DBRS expects the digital business to grow in the high-single digits. DBRS notes that the sustainability of digital revenue growth will depend on accelerating customer acquisitions, controlling churn and average revenue per customer erosion as well as pricing optimization. Print revenues will continue their structural decline. As such, consolidated revenues should range between $830 million and $840 million in 2016 and 2017 and increase from there in 2018. As the mix continues to evolve, DBRS expects EBITDA margins to migrate to the 28% range over the medium term.

In terms of financial profile, DBRS expects the Company to continue to execute its deleveraging strategy, including repaying roughly $100 million of the Senior Secured Notes in 2016 and investing in its digital transformation. DBRS expects Yellow Pages’ credit metrics to improve in 2016 and beyond (i.e., gross debt-to-EBITDA well below 2.0x, free cash flow as a percentage of debt above 25% and EBITDA interest coverage above 5.0x).

The Company has stated its intention to completely deleverage by 2018, which DBRS believes is reasonable, but will depend on the successful execution of its digital strategy; however, the B (high) Issuer Rating is not reliant on this occurrence. In fact, the credit risk could continue to strengthen within the revised rating categories with progress made on this front in the interim period.

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 methodology is Rating Companies in the Publishing Industry (April 2016) and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.