DBRS Confirms Yellow Pages Limited Issuer Rating of B (high) with a Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating of Yellow Pages Limited at B (high). DBRS also confirmed Yellow Pages Digital & Media Solution’s (together with Yellow Pages Limited, Yellow Pages or the Company) Senior Secured Notes rating of BB (low) and Subordinated Exchangeable Debentures rating of B (low). All trends are Stable. The confirmations incorporate the appointment of a new Chief Executive Officer (CEO), the new customer centric go-to market strategy and the refinancing of the Company’s Senior Secured Notes. The ratings continue to reflect Yellow Pages’ digital growth opportunity, strong brand recognition, valuable customer relationships and ability to generate cash flow. The ratings also consider the continued erosion of the print business, intense competitive environment and sizable debt burden.

Although Yellow Pages’ profitability for the YTD Q3 2017 nine-month period ended September 30 (YTD 2017) was below DBRS’s previous expectations, the Company’s earnings remain reasonable for the rating category. Consolidated revenues fell by 8.6% to $562 million YTD 2017, primarily reflecting a year-over-year (YOY) decline in digital revenue, net customer losses and lower average revenue per customer. Adjusted EBITDA margins declined to 24.4% YTD 2017 from 28.9% in 2016 primarily as a result of the expected decline in print revenue and changes in the product mix toward lower-margin digital solutions versus the Company’s owned and operated desktop and mobile properties. As such, Adjusted EBITDA fell by 22.9% YOY to $137 million YTD 2017.

Despite the decline in operating income and cash flow, the Company’s free cash flow remains sufficient to support the current rating. As the Company continues to direct free cash flow toward debt repayment, credit metrics have softened only modestly. While credit metrics have not performed as well as previously anticipated, DBRS notes that the Issuer Rating was positioned at the upper end of the B (high) rating, which provides an adequate cushion in the rating category based on the Company’s outlook.

Yellow Pages’ earnings profile is expected to further soften over the near term, as the Company focuses on executing its new customer centric go-to market strategy introduced in early 2017 that provides an integrated, scalable and customized experience to its clients. Internal realignment of customer-facing functions should support the Company’s ability to better capitalize on account opportunities and drive margin contributions through a streamlined operating structure, which should benefit the earnings profile over the medium to longer term. As Yellow Pages directs free cash flow toward debt repayment, DBRS expects 2017 gross debt-to-Adjusted EBITDA, lease-adjusted operating cash flow-to-total debt and Adjusted EBITDA interest coverage of 2.76 times (x), 24.0% and 3.96x, respectively. Reflecting a modest YOY softening of Adjusted EBITDA, combined with mandatory debt repayment, credit metrics for 2018 are expected to be similar to 2017.

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 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 under Related Documents or by contacting us at info@dbrs.com.

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

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