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Moody's assigns B2 corporate family rating to YP

Global Credit Research - 08 May 2013

New York, May 08, 2013 -- Moody's Investors Service ("Moody's") assigned a B2 corporate family rating and a B3-PD probability of default rating for YP Holdings LLC ("YP" or "the company"). The ratings agency also assigned a B2 (LGD3-40%) rating to the company's $775 million senior secured term loan B due 2018. YP plans to use the borrowings from the term loan and new $450 million senior secured asset-based revolver (unrated) to refinance existing debt, pay a one-time distribution to shareholders and pay related fees and expenses.

Moody's has taken the following rating actions:

Issuer: YP Holdings LLC

Corporate Family Rating -- Assigned B2

Probability of Default Rating -- Assigned B3-PD

Outlook -- Stable

Senior Secured 1st Lien Term Loan B due 2018 -- Assigned B2, LGD3-40%

RATINGS RATIONALE

YP's B2 corporate family rating is supported by its position as the largest print and digital yellow pages business in the U.S. with predictable near-to-medium term profitability, a fairly large and growing digital advertising business, solid EBITDA margins, modest leverage and our expectation for fairly rapid deleveraging following this debt raise. Because the business has very low capital intensity with capital expenditures typically being below 3% of revenues, significant free cash flow is generated by its geographically diverse portfolio of assets. These strengths are offset by the fairly rapid decline in of the print directory segment, which accounts for about 65% of revenues, very low barriers to entry digital advertising and its expanding competitive challenges. Nevertheless, we expect the print directory business will be able to sustain positive (though quickly shrinking) cash flows for several more years due to the contractual nature of the business model.

On May 8, 2012, Cerberus acquired a controlling interest in AT&T's Ad Solutions / Interactive Division, now known as YP. Over the next 8 months, YP realized significant operational improvements: EBITDA margins and free cash flow expanded compared to historical trends and the company paid down a material amount of its debt taken on to fund the transaction. Much of the margin expansion and improvement in cash flow profile can be attributed to operational initiatives, such as outsourcing print ad production, renegotiating lower cost contracts, real estate consolidation and headcount reductions. Due to Cerberus' considerable improvements of YP in its first 8 months as well as Cerberus' track record of turning around other underperforming companies, Moody's believes additional operating enhancements will be realized over the next couple of years, offsetting some of the secular declines in the print business.

While revenue deterioration in the print segment is unavoidable, YP has the benefit of owning the largest digital yellow pages business in the US, with annual revenues of about $1.0 billion. We project modest revenue growth of the digital business over the next several years but total revenue declines over the next several years due to anticipated steep declines in print revenue.

Moody's believes that the company has good liquidity, due mainly to its ability to generate strong free cash flow and availability under its asset-based revolver. The excess cash sweep provision of the term loan will lead to a steady decline in debt levels.

YP's capital structure includes a $450 million senior secured asset-based revolving credit facility due 2018 (unrated by Moody's) and $775 million in senior secured term loan B due 2018. The loan ranks below the asset-based revolving credit facility in the capital structure and is rated B2 (LGD3-40%), in line with the Corporate Family Rating as they represent most of the debt capital of the company. The term loan is secured by a second lien pledge on all current assets and a first lien pledge on substantially all other assets of YP Holdings LLC and its direct and indirect subsidiaries. Mandatory prepayments on the term loan consist of 75% of excess cash flow, with step downs taking place later on. The term loan contains one financial covenant, total leverage, which we believe the company will have ample cushion room for. The asset-based revolver is secured by a first lien pledge on all current assets and a second lien pledge on substantially all other assets of the company and each subsidiary of YP Holdings LLC. The revolver has two financial covenants: a minimum quarterly fixed charge coverage ratio of 1.00x and a minimum undrawn availability covenant of $15 million.

The stable outlook is based on Moody's view that the company will execute crisply from an operational perspective and that the vast majority of free cash flow will be applied to debt reduction.

The ratings are unlikely to be upgraded due to the secular decline of the print business and low barriers to entry in the digital segment.

The ratings could be lowered if the print business erodes faster than expected (about 20% per year) and the digital business fails to grow leading to a more rapid decline in free cash flow and less debt reduction than currently contemplated. Also, any event that delays a swift decline in leverage (Debt to EBITDA approaching 1.5x for the year ended December 31, 2015) could result in a rating downgrade.

This is the first time that Moody's has rated YP.

The principal methodology used in this rating was Global Publishing Industry published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dennis Saputo
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns B2 corporate family rating to YP
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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