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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
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.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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