DBRS Assigns Rating of BB (low) to New Senior Secured Notes of Yellow Pages Digital

DBRS Limited (DBRS) assigned a rating of BB (low) to Yellow Pages Digital & Media Solutions Limited’s (the Issuer) $315 million issuance of new 10.0% Senior Secured Notes, with a Stable trend and a recovery rating of RR3. Yellow Pages Digital & Media Solutions Limited is a 100% wholly owned subsidiary of Yellow Pages Limited (the Company or the Guarantor), which currently has an Issuer Rating B (high) with a Stable trend.

Proceeds from the issuance of the new 10.0% Senior Secured Notes due November 1, 2022, after fees expenses, and accrued and unpaid interest on the 9.25% Senior Secured Notes, will be used to fully redeem all of the Issuer’s outstanding 9.25% Senior Secured Notes due November 30, 2018. The RR3 recovery rating on the new 10.0% Senior Secured Notes assumes the full repayment of the outstanding 9.25% Senior Secured Notes.

The new 10.0% Senior Secured Notes have a five-year term and are secured on a first-priority basis by substantially all of the Issuer’s, Guarantor’s and subsidiaries’ assets. The new 10.0% Senior Secured Notes have a mandatory redemption at par in May and November of each year, based on the Company’s excess free cash flow in the proceeding six-month period and carry a redemption option by the Issuer that is effective immediately. The motivation for the refinancing at this time is: (1) the 9.25% Senior Secured Notes became callable at par starting May 31, 2017; (2) to provide a stable capital structure as the Company executes on its next phase of evolution; and (3) to increase debt repayment flexibility (i.e., immediate redemption option) for the Company.

The recovery rating on the new 10.0% Senior Secured Notes is RR3, representing an expected recovery in the 60% to 80% range. Recovery on the new 10.0% Senior Secured Notes is secured by the first-priority basis of substantially all of the Issuer’s and Guarantor’s assets that are not secured under the Issuer’s asset-based loan facility valued at $50 million.

Although the Company’s revenues and Adjusted EBITDA in H1 2017 were below DBRS’s expectations, the Company’s credit risk profile remains reasonable for the rating category. DBRS notes that the Issuer Rating has been positioned at the upper end of the B (high) rating, which provides an adequate cushion in the rating category based on the earnings and financial outlook. Over the last several years, the Company has benefited from its growing presence as a digital platform, strong brand recognition in the small- and medium-enterprises market across Canada, large customer base and ability to leverage stable cash flow from its legacy print business. However, these strengths have been challenged by a highly competitive landscape for digital solutions and a sizeable (although moderating) debt burden. The Issuer Rating continues to reflect our belief in the Company’s ability to execute on its updated go-to-market strategy, meaningful long-term growth in its digital business, a corresponding realignment of the Company’s internal operating structure, continued financial deleveraging, while also fully considering the material erosion of the print business as customers shift to alternative forms of digital advertising.

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

The principal methodology is Rating Companies in the Publishing Industry, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.