MOODY’S ASSIGNS Ba3 TO CBD MEDIA’S PROPOSED $160MM SECURED FACILITY AND B3 TO PROPOSED $150MM SUB NOTES; RATINGS OUTLOOK IS STABLE
Moody’s Investors Service assigned ratings to the proposed debt of CBD Media LLC (“CBD”), the principal operating subsidiary of CBD Media Holdings (“Holdings”). The ratings actions were in response to the company’s announced refinancing of its bank facility and issuance of new subordinated notes, the proceeds of which will be used to repay indebtedness and to provide a cash dividend of approximately $133 million to the company’s existing equity holders, Spectrum Equity Investors and Broadwing Inc.. Despite the good cash flow and solid revenue streams afforded by its incumbent position as the owner and publisher for Cincinnati Bell branded yellow pages, the ratings are constrained by the magnitude of CBD’s total debt which well exceeds revenue of $83 million, the company’s small size relative to other publicly rated telephone directories publishers, and the significant concentration risk serving only the Greater Cincinnati area. Liquidity pro-forma for the proposed transactions should be adequate given the relatively modest working capital requirements and capital expenditures (approximately $5 million proposed revolver fully available at closing). However in Moody’s opinion, the margin for error regarding liquidity is modest. The stable outlook reflects tolerance within the ratings categories for moderate fluctuations in credit statistics. This is the first time Moody’s rates the debt of this privately held incumbent publisher of telephone directories.
The following ratings were assigned:
Ba3 rating to the proposed $165 million secured credit facility
B3 rating to the proposed $150 million senior subordinated note, due 2013
B1 rating for the senior implied at Holdings
B3 rating for the senior unsecured issuer rating at Holdings
The ratings outlook is stable.
The ratings are subject to review of final documentation.
The ratings reflect concern about the company’s very thin capitalization and sizable debt burden, notably given the significant geographic concentration of its operations and the potential threats to disruption in the region’s economy. Moody’s anticipates that CBD will continue to have deficit retained earnings which would further impair the weak balance sheet (pro-forma at closing, the accumulated deficit is approximately $6 million). In Moody’s opinion, liquidity pro-forma for the proposed transactions is constrained by minimal cash on hand. This is of particular concern during the second quarter when cash outflows are likely to peak. Another concern is the absence of secondary sources of liquidity. Assets are encumbered, and it is not likely that a viable business segment could be carved out and sold in a distress scenario without material impairment to enterprise.
The ratings also acknowledge the benefits of its 20 year exclusive contracted relationship with Cincinnati Bell; its incumbent position in the area served; and the visibility into its earnings given the nature of its marketing and publications schedule, as well as given the fact that over 80% of operating expenses are outsourced under long term contracts with maturities through 2007. Additionally, the ratings reflect favorable industry fundamentals and pricing flexibility.
The stable ratings outlook assumes no fundamental change in CBD’s core business, stability in its management team, and no debt-funded acquisitions. Material increases in financial leverage, the ratio of SG&A to sales, and/or tightening of interest coverage could also put downward pressure on the ratings outlook. More positively, significant reduction in total debt, meaningful revenue and earnings growth, and consecutive improvement in credit statistics could migrate the ratings outlook to positive.
Pro-forma for the closing of the proposed transactions, free cash flow to total debt is good, especially for the rating categories, at approximately 10%. However, it is overshadowed by thin equity, high financial leverage, and moderate coverage of interest expense over the intermediate term. Total debt of approximately $309 million to EBITDA of approximately $51 million is slightly over 6 times. Debt is 3.6 times total revenue. EBITDA less capital expenditures covered interest expense approximately 3 times.
The Ba3 rating assigned to the proposed credit facility reflects its priority position in the capital structure and adequate collateral coverage. Rating the facility one notch above the B1 senior implied reflects Moody’s estimates of sufficient residual value, in a distress scenario, to fully cover outstandings when some value is given to intangibles. EBITA return on assets in the mid to high teens historically serves to justify the assignment of some value to the company’s high level of intangibles at over 90% of total assets. The facility consists of a $5 million revolver, maturing in six years, and a $160 million term loan B, maturing in six and a half years. Outstandings are secured by a first lien on all tangible and intangible assets of CBD and all of its capital stock. The borrower is CBD, and guarantees from Holdings and from CBD’s direct and indirect subsidiaries support the facility. Financial covenants were not finalized at the time of Moody’s review, however they are expected to address maximum total leverage, maximum senior leverage, minimum fixed charge coverage, minimum pro-forma debt service, and minimum interest coverage. Required annual term amortization is expected to be minimal relative to pro-forma free cash flow.
The B3 assigned to the proposed senior subordinated notes reflects their contractual subordination to senior debt of approximately $160 million at closing. The issuer is CBD, and guarantees from each existing and future domestic subsidiary. Holdings does not guarantee the proposed subordinated notes.
Headquartered in Cincinnati, Ohio, CBD Media LLC is a multi-media publisher of 15 Yellow and White Page directories covering Greater Cincinnati, Northern Kentucky, South Eastern Indiana and Dayton. The primary publications are the Cincinnati Bell Yellow Pages and The WorkBook. Pro-forma consolidated annual net sales are approximately $86 million and EBITDA is approximately $51 million.
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