DBRS Confirms Yellow Pages Limited’s Issuer Rating at 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 Solutions Limited’s (together, with Yellow Pages Limited, Yellow Pages or the Company) Senior Secured Notes rating at BB (low) with a Recovery Rating of RR3 and Subordinated Exchangeable Debentures rating at B (low) with a Recovery Rating of RR6. All trends are Stable. The confirmations incorporate the challenging operating environment, the asset divestitures and improved operating leverage. 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’ year-to-date (YTD) 2018 revenue performance has been below DBRS’s previous expectation, operating earnings have been considerably stronger than anticipated as a result of cost-cutting initiatives, streamlining operations and non-core asset divestitures. Consolidated revenues fell by 17.6% to $453 million YTD 2018, reflecting a decline in digital and print revenue and asset divestitures. However, EBITDA margins increased 840 basis points year over year (YOY) to 33.4% YTD 2018, primarily as a result of cost-saving measures, the rationalization of office space and initiatives to streamline operations. As a result, adjusted EBITDA was $151.4 million, up 10.2% YOY through the first nine months of 2018.

The YOY improvement in operating income and cash flow, combined with debt repayment, has had a positive impact on credit metrics. As such, DBRS notes that the Issuer Rating remains well positioned in the B (high) rating.

Although revenue pressure is expected to persist, Yellow Pages’ earnings are expected to improve in 2018 as the Company prioritizes increasing profitability and continues to streamline its ability to deliver digital and traditional marketing services to its clients. The internal realignment of customer-facing functions should support the Company’s long-term ability to capitalize on account opportunities, which should benefit the earnings profile over the medium to longer term.

As expected, Yellow Pages’ financial risk profile stabilized in 2018, although DBRS expected it to be achieved through a more balanced improvement in revenue and EBITDA results, in combination with debt repayment. DBRS continues to view 2017 as the recent high-water mark in terms of leverage and anticipates the Company will continue to prioritize debt repayment as its top free cash flow priority. As a result, financial leverage may improve to levels that are more in line with higher-rated companies, despite the persistence of a very challenging operating environment and continued pressure on long-term profitability, a scenario that could lead to a positive rating action.

DBRS notes that the above press release was amended on July 11, 2019, to add the principal criteria in the Notes section. The amendment was minor and would not impact the understanding of the reader.

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

The principal methodologies are Rating Companies in the Publishing Industry and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on dbrs.com under Methodologies & Criteria.

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.

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

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