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Rating Action:

MOODY'S ASSIGNS CBD MEDIA HOLDINGS' SENIOR NOTES Caa2 AND LOWERS EXISTING RATINGS - SENIOR IMPLIED TO B2; OUTLOOK STABLE

19 Oct 2004
MOODY'S ASSIGNS CBD MEDIA HOLDINGS' SENIOR NOTES Caa2 AND LOWERS EXISTING RATINGS - SENIOR IMPLIED TO B2; OUTLOOK STABLE

Approximately $400 million in debt instruments affected.

New York, October 19, 2004 -- Moody's Investors Service lowered the existing ratings for CBD Media Holdings LLC ("Holdings") and CBD Media LLC, ("CBD") including the company's senior implied to B2 from B1, senior secured facilities to B1 from Ba3 and senior subordinated notes to Caa1 from B3 in response to the company's proposed debt issuance and consequent $127 million dividend to the equity sponsor, principally Spectrum Equity. In addition, Moody's assigned a new Caa2 rating for the $100 million senior note issuance by CBD Media Holdings. Pro forma for the transaction, the company's leverage, at 8.1 times debt-to-cash flow, exceeds the initial March 2002 purchase price of 7.7 times. In Moody's view, the increased level of financial risk is only somewhat mitigated by the modest level of business risk encountered by CBD, as the incumbent directory operator in the Cincinnati environs. This concludes Moody's review for possible downgrade of the company's ratings, which commenced October 13, 2004.

Moody's reported the following rating actions:

- assigned a Caa2 rating to Holdings' $100 million senior notes due 2012;

- lowered the senior implied rating to B2 from B1;

- lowered the rating on the $158 million of secured bank credit facilities to B1 from Ba3;

- lowered the rating on the $150 million of senior subordinated notes due 2011 to Caa1 from B3;

- lowered the senior unsecured issuer rating to Caa2 from B3.

The rating outlook is stable.

The ratings reflect the company's high leverage and consequent thin margin for error following the equity sponsor's history of dividends, including $133 million in 2003 and $127 million, currently. CBD faces significant challenges, including concentration risk as a single market operator and the potential for competition to intensify, particularly from better capitalized operators, albeit not incumbents (Verizon entered the market in the first quarter of 2004). Furthermore, critical to CBD's position as the incumbent is its relationship with Cincinnati Bell, the telephone service provider which is also relatively weakly capitalized and vulnerable to competition (Cincinnati Bell has a B1 senior implied rating and a positive outlook). CBD is also susceptible to competition from other media and Moody's expects, increasingly, from the Internet. Finally, the directory business is mature with limited growth opportunities and the alternative, opportunities on the expense side, are constrained by CBD's already very thin staff due to an unusually high level of outsourcing (sales, printing, distribution, and billing). As a result, the company is likely to have fewer options for improving cash flow or preventing it potential deterioration.

However, the ratings also consider the company's incumbent status and the stability that it has provided to date. CBD has an 85% market share and reports 85% customer retention. The operating margin as measured by EBITDA is among the strongest in the sector at greater than 50% and capital investment requirements are quite low. Moreover, greater than 50% of EBITDA is converted into free cash flow, allowing for fairly rapid debt repayment going forward. Further, while CBD's leverage is extremely high at about 8 times, Moody's recognizes that current public market multiples for directory businesses are greater than 10 times, although its peers have much greater geographic diversity.

The stable outlook reflects the expectation of a stable operating environment and the use of free cash flow to de-lever. Meaningfully lower leverage would be necessary before the outlook could change to positive. Conversely, the ratings could experience further negative momentum should either the business environment become more competitive or financial pressure increase due to weak economic factors. Moody's remains concerned about the potential for a negative event to impact the company's valuation and the vulnerability of the balance sheet established by the substantial reduction in equity over such a short period of time.

Pro-forma for the proposed transaction, debt-to-EBITDA is high at 8.1 times (Moody's calculates EBITDA after Spectrum's annual management fee of $2 million). Coverage of interest expense is a more reasonable 2.2 times, particularly given the low CapEx requirements. Free cash flow-to-total debt is expected to remain good, relative to CBD's rating category, at approximately 6%. Given the relatively good level of free cash flow, we expect CBD to be able to de-lever and the company is likely to be closer to 7.5 times debt-to-EBITDA by year end 2005.

The B1 rating on the senior secured credit facility reflects its priority position in the capital structure and reasonable collateral coverage. 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 subsidiaries support the facility. The Caa1 rating on the senior subordinated notes reflects their effective and contractual subordination to senior debt of approximately $153 million at closing. The senior subordinated notes do, however, benefit from subsidiary guarantees. The Caa2 rating on the proposed senior notes at Holdings reflects its structural subordination to a sizable layer of debt at CBD and the absence of guarantees.

Headquartered in Cincinnati, Ohio, CBD Media LLC is the exclusive telephone directory publisher for Cincinnati Bell-branded yellow pages in the Cincinnati-Hamilton metropolitan area, which is the 23rd largest metropolitan area in the country.

New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Christina Padgett
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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