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Rating Action:

MOODY'S ASSIGNS Caa1 RATING TO R.H. DONNELLEY'S PROPOSED $1,842 MILLION SENIOR UNSECURED NOTES; CORPORATE FAMILY RATING DOWNGRADED TO B1 FROM Ba3

07 Nov 2005
MOODY'S ASSIGNS Caa1 RATING TO R.H. DONNELLEY'S PROPOSED $1,842 MILLION SENIOR UNSECURED NOTES; CORPORATE FAMILY RATING DOWNGRADED TO B1 FROM Ba3

Approximately $11.3 Billion of Rated Debt Securities Affected

New York, November 07, 2005 -- Moody's Investors Service has assigned a Caa1 rating to R.H. Donnelley Corporation's proposed $1,842 million senior unsecured notes and downgraded the Corporate Family rating to B1 from Ba3. Full details of Moody's rating action are as follows:

Ratings assigned:

R.H. Donnelley Corporation's

proposed $1,842 million 8% senior unsecured notes -- Caa1

R.H. Donnelley Inc.'s

proposed $350 million add-on senior secured term loan D-1, due 2011 -- Ba3

Dex Media, Inc.'s

proposed $250 million add-on senior unsecured notes -- B3

Dex Media West LLC's

proposed $503 million add-on senior secured term loan B-1, due 2010 -- Ba2

Ratings confirmed:

R.H. Donnelley Inc.'s

$175 million senior secured revolving credit facility, due 2009 -- Ba3

$544 million senior secured term loan A, due 2009 -- Ba3

$1,433 million senior secured term loan D, due 2011 -- Ba3

$325 million 8 7/8% senior notes, due 2010 -- Ba3 (will be withdrawn at closing)

$600 million 10 7/8% senior subordinated notes, due 2012 -- B2

Dex Media Inc.'s

Corporate Family rating -- Ba3 (will be withdrawn at closing)

$570 million 9% senior discount notes, due 2013 -- B3

$500 million 8% senior unsecured notes, due 2013 -- B3

Dex Media East LLC's

$100 million senior secured revolving credit facility, due 2008 -- Ba2

$364 million senior secured term loan A, due 2008 -- Ba2

$452 million senior secured term loan B, due 2009 -- Ba2

Dex Media West LLC's

$100 million senior secured revolving credit facility, due 2009 -- Ba2

$392 million senior secured term loan A, due 2009 -- Ba2

$917 million senior secured term loan B, due 2010 -- Ba2

$385 million senior unsecured notes, due 2010 -- B1

$300 million senior unsecured notes, due 2011-- B1 (will be withdrawn at closing)

$762 million 9 7/8% senior subordinated notes, due 2013 -- B2

Ratings upgraded:

Dex Media East LLC's

$450 million 9 7/8% senior unsecured notes, due 2009 -- to Ba3 from B1

$341 million 12 ¼% senior subordinated notes, due 2012 -- to B1 from B2

Ratings downgraded :

R.H. Donnelley Corporation's

Corporate Family rating -- to B1 from Ba3

$300 million 6 7/8% senior unsecured notes, due 2013 -- to Caa1 from B3

R.H. Donnelley Corporation's speculative grade liquidity rating is confirmed at SGL-1. However, Moody's expects to withdraw this rating at closing and assign a new speculative grade liquidity rating to the surviving entity.

The rating outlook is stable.

This concludes the review which was initiated on October 4, 2005, following the announcement that R.H. Donnelley signed a definitive agreement to purchase Dex Media Inc. ("Dex") for approximately $9.9 billion, including $2.4 billion in stock, $2.0 billion in cash, and the assumption of approximately $5.5 billion in Dex's debt, in a transaction which is expected to close by the end of March 2006. The purchase price represents a multiple of approximately 10.5 times Dex's LTM EBITDA at the end of June 2005. In addition, R.H. Donnelley Corporation plans to redeem $332 million of preferred stock from the proceeds of $330 million in new senior notes.

The downgrade of the Corporate Family rating to B1 from Ba3 reflects the proposed issuance of close to $3.0 billion in debt (over $2.3 billion of incremental net debt) by R.H. Donnelley Corporation and its subsidiary companies in connection with its planned acquisition of Dex Media Inc and redemption of R.H. Donnelley Corporation's preferred stock obligations. The lowered ratings reflect the pressure which Moody's expects the incremental debt will place, not only on R.H. Donnelley Corporation following the acquisition ("the surviving company"), but also upon each of its subsidiary debt issuers. The incremental debt will be most heavily borne by the holding company, R.H. Donnelley Corporation (over $1.8 billion), and to a lesser degree, by Dex Media Inc. ($250 million), Dex Media West LLC (approximately $200 million net debt increase), and R.H. Donnelley Inc. ($25 million net debt increase). Dex Media East LLC plans to issue no incremental debt.

The confirmation of the senior secured debt ratings of Dex Media East LLC, Dex Media West LLC , and R.H. Donnelley Inc. acknowledges their proven track record of generating strong and predictable cash flow which continues to provide the potential to meaningfully reduce financial leverage over time.

The stable outlook is supported by R.H. Donnelley's and Dex's strong market position as the "official" directory, their dependable revenues, and strong cash flow generation.

Moody's expects to withdraw the Corporate Family rating of Dex Media Inc. and other refinanced debt issues, as outlined above, upon the closing of the proposed transaction.

At closing, the surviving company's consolidated debt will be issued by five separate issuers. No individual issuer guarantees or plans to guarantee the debt of another, with the exception that R.H. Donnelley Corporation will continue to guarantee the debt of R.H. Donnelley Inc. While all debtholders implicitly benefit from the surviving company's consolidated cash flows, their contractual claims do not provide for recourse beyond the individual issuer level. In particular, holders of the debt of both holding companies - R.H. Donnelley Corporation and Dex Media Inc. are dependent upon the continuing ability of R.H. Donnelley Inc., Dex Media East LLC and Dex Media West LLC to effect dividends in accordance with management's current expectations. Moody's expects that the operating companies will continue to upstream cash flow for the holding companies to service their debt. However, the sufficiency of these cash dividend payments cannot be assured, especially in a downside scenario.

R.H. Donnelley Corporation's proposed $1,842 million senior unsecured notes will be divided into two series. The notes will comprise: (1) Series 1 of $330 million, the proceeds of which will be used to fully redeem the remaining preferred stock of R.H. Donnelley Corporation held by Goldman Sachs Capital Partners, and (2) Series 2, with proceeds applied to the Dex acquisition purchase price. Complete terms and conditions of the notes have not yet been finalized; however, Moody's understands that they will substantially conform to the terms and conditions of R.H. Donnelley Corporation's existing senior unsecured notes. The notes' lowest debt ranking in the surviving company's capital structure is underscored by the Caa1 rating assignment -- three notches below the Corporate Family rating. The notes are rated one notch below that of the lowest surviving company subsidiary debt rating (Dex Media Inc.'s B3 senior unsecured notes). In addition, the rating of the proposed notes (and the downgrade of the rating of R.H. Donnelley's existing senior unsecured notes) incorporates Moody's view that the senior unsecured noteholders will no longer benefit from the loss absorption currently provided by R.H. Donnelley Corporation's preferred stock.

Moody's assigns a Ba3 rating assigned to R.H. Donnelley Inc.'s proposed $350 million term loan D-1, is at parity with ratings on R.H. Donnelley Inc.'s senior secured credit facilities. R.H. Donnelley Inc. plans to use proceeds from this facility to refinance its $325 million senior notes. This effectively represents a like-debt substitution, since a springing lien on the current senior unsecured notes provides collateral benefits which rank pari-passu to those of senior secured lenders. R.H. Donnelley Inc.'s current ratings are confirmed in recognition of the modest incremental debt which it will incur as a result of the proposed financing. The ratings recognize good results at R.H. Donnelley's Sprint properties, which remain offset by disappointing results by those of the SBC properties acquired in 2004.

Dex Media East LLC plans to issue no new debt in connection with the Dex acquisition. Dex Media East LLC's ratings reflect an expectation that the company will continue to maintain its position as the least-leveraged subsidiary. Although Moody's recognizes continuing improvements in Dex East's "standalone" financial profile, this is offset from a ratings perspective by the increased consolidated debt burden which this subsidiary will implicitly bear as a result of the proposed acquisition. The upgrade of Dex Media East's senior secured and senior subordinated debt ratings represents a favorable compression of ratings in light of the improving fundamental performance of its operations.

Moody's assigns a Ba2 rating to Dex Media West LLC's proposed $503 million Term Loan B-1, which is at parity with ratings on its current senior secured credit facilities. Proceeds from the term loan will be used to redeem $303 million of Dex Media West LLC's senior unsecured notes. While the proposed financing will increase Dex West LLC's net debt by approximately $200 million, Moody's expects that relatively strong cash flow will be used to reduce this debt to pre-acquisition levels in the near term. Moody's confirmation of all ratings of Dex Media West LLC are underscored by an expectation that it will return its debt and leverage levels to pre-acquisition levels in the near term.

Moody's assigns a B3 rating to Dex Media Inc.'s proposed $250 million of senior secured notes and confirms the rating of its existing senior unsecured notes. The ratings assignment is consistent with ratings of the company's existing senior unsecured notes. Moody's expects that Dex Media Inc. will be able to reduce the burden of its debt to more manageable levels over the next two years through the proceeds of cash dividends upstreamed from Dex East LLC and Dex West LLC.

The proposed merger will more than double the size of R.H. Donnelley's business, resulting in a combination which will represent the third largest US directory publisher, in terms of revenues. However, Moody's expects that the merger will result in relatively modest synergies, given the absence of geographic footprint overlap.

Moody's considers that the directory publishing sector as a whole has little to no sustainable top line growth prospects. In addition, operators like R.H. Donnelley face competition, with two or more rival yellow page publishers competing for advertising spending in virtually all markets.

Directory publishing is a high-margined business which generates substantial levels of free cash flow. The relative strength and predictability of this cash flow and the meaningful organic debt reduction opportunity which it presents to both R.H. Donnelley and Dex, underlies ratings which are typically assigned to less leveraged issuers. However, instead of deleveraging, both operators have historically chosen to periodically releverage in order to pursue acquisitions or make shareholder distributions. Since the beginning of 2004, R.H. Donnelley Corporation has increased its debt and significantly worsened its leverage in order to make acquisitions and redeem preferred stock. Moody's had expected that R.H. Donnelley Corporation would reduce consolidated debt to closer to five times EBITDA by the end of 2005, following a spike in leverage resulting from the 2004 acquisition of the SBC properties, In addition, Moody's had expected that the company would spend more time to address the relatively weaker performance at the SBC properties (formerly Ameritech's Illinois Publishing) before embarking on further acquisition activity.

Headquartered in Cary, North Carolina, R.H. Donnelley Corporation reported LTM revenues of approximately $2.7 billion at the end of June 2005, pro-forma for the proposed acquisition of Dex Media Inc.

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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