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Global Credit Research - 16 Sep 2010
$130 million of rated debt affected
New York, September 16, 2010 -- Moody's Investors Service downgraded Caribe Media, Inc.'s
(Caribe") ratings, including its Corporate Family Rating (CFR)
to Caa2 from B3, Probability of Default Rating to Caa3 from B3,
and associated instrument ratings as detailed below. The rating
actions follow the September 8, 2010 announcement by the company
that it had engaged a financial advisor to evaluate the capital structure
of its parent holding company, Local Insight Media Holdings,
Inc. ("LIMH"), and broadly reflect Moody's view that
the company is likely to default on a more imminent basis given persistently
difficult business conditions and ensuing high financial leverage,
as now exacerbated by tightening financial covenants. In a distress
scenario, we estimate ultimate recovery prospects in the range of
60%-70% of (principally) debt claims, with
subordinated debt absorbing most of the loss severity. The one-notch
downgrade of the senior secured debt rating to B3 principally reflects
the increased risk of default, partially offset by the above-average
anticipated firm-wide recovery expectation and comparatively favorable
position of senior secured debt holders (note specifically the reduced
loss given default estimate) relative to more junior subordinated debt
holders. This completes the review for possible downgrade initiated
on September 9, 2010.
Issuer: Caribe Media, Inc.
Corporate Family Rating, Downgraded to Caa2 from B3
Probability of Default Rating, Downgraded to Caa3 from B3
Senior Secured Revolver due 2012, Downgraded to B3, LGD2-16%
from B2, LGD3-35%
Senior Secured Term Loan due 2013, Downgraded to B3, LGD2-16%
from B2, LGD3-35%
Issuer: Caribe Media, Inc.
Moody's does not rate Caribe's $50.6 million (includes PIK
accretion) of subordinated notes due 2014, which are held entirely
by its primary shareholder Welsh, Carson, Anderson & Stowe
Caribe's Caa2 CFR reflects the company's small size and high
leverage in the face of declining demand for yellow pages advertising
from small and medium-sized businesses in Puerto Rico. The
ratings also reflect the company's high leverage with 5.2x
total debt-to-EBITDA as of June 30, 2010 (incorporating
Moody's standard adjustments). Through the six months ended
June 30, 2010, revenues declined 7% to $50 million
while EBITDA fell 25% to $17.1 million (34%
margin) due to weak advertising demand in a soft economy, primarily
in Puerto Rico, and an increase in bad debt expense. In the
same six months of 2009, Caribe generated $22.7 million
of EBITDA with 42% margins. We expect continued weak demand
for core yellow pages products and services over the next twelve months.
Liquidity is expected to be constrained as Caribe reported $1.8
million of cash at June 30, 2010 and, in a scenario in which
financial covenants are violated, it would no longer have access
to $7 million of availability on its $10 million revolver
(excludes $3 million of unfunded commitments from a subsidiary
of Lehman Commercial Bank). In a default scenario, Caribe
would eliminate dividends and apply available cash to reduce debt balances
as leverage ratio covenants become more restrictive with quarterly step-downs
through March 2011. Although the company had built up cash balances
through 1Q09, dividends totaling $29.9 million by
year end 2009 notably eliminated this liquidity cushion. In the
absence of term loan prepayments, debt balances would continue to
increase as accruing subordinated PIK debt of approximately $6
million per year more than offsets the $1.5 million of scheduled
annual amortization on the term loans. In a restructuring,
we would expect a good portion of the subordinated notes to be equitized.
Caribe is one of three operating groups under the LIMH parent holding
company. The two other operating groups, Local Insight Media
Regatta Holdings, Inc. (Ca, as revised today,
also with a negative rating outlook) and Local Insight Media Finance,
LLC (Baa3, on review for downgrade), are also highly leveraged
entities with declining revenue prospects, neither of which are
in a position to provide needed liquidity to Caribe. We estimate
that total debt for the consolidated entities exceeds $1.8
billion with reported debt-to-reported EBITDA of more than
7.5x for the consolidated entity. Although debt facilities
at Caribe are legally separate from its affiliates and do not cross default
to debt instruments issued by affiliates, Moody's view is that management,
together with its advisors, may address its refinancing strategy
at a consolidated level given reliance on intercompany dividends and affiliate
"The negative outlook reflects Moody's view that Caribe's
capital structure is unsustainable, liquidity is constrained,
and demand for the company's core yellow pages advertising products,
particularly in its Puerto Rico markets, is in decline, making
it increasingly likely that the company will default on its financial
covenants in the near term," stated Carl Salas, Vice President
at Moody's Investors Service.
A rating upgrade is deemed unlikely in the absence of an equity injection
to reduce debt levels to a more sustainable level and more comfortably
within compliance of financial maintenance covenants. We would
downgrade ratings if revenue or EBITDA were to decline below our expectations
or if the company were to exchange debt securities at sub-par values.
Moody's last rating on Caribe occurred on June 23, 2009 when it
downgraded the CFR and PDR, each to B3, and downgraded associated
instrument ratings in addition to changing the outlook to negative.
On September 9, 2010, Moody's placed all ratings on review
for possible downgrade.
Caribe's ratings were assigned by evaluating factors we believe are relevant
to the credit profile of the issuer, such as i) the business risk
and the competitive position of the company versus others in its industry,
ii) the capital structure and the financial risk of the company,
iii) the projected financial and operating performance of the company
over the near-to-intermediate term, and iv) management's
track record and tolerance of risk. These attributes were compared
against other issuers both within and outside of Caribe's core industry
and Caribe's ratings are believed to be comparable to those of other issuers
of similar credit risk.
The principal methodology used for the instrument ratings of Caribe Media,
Inc. was the Probability of Default Ratings and Loss Given Default
Assessments rating methodology published in June 2009. Other methodologies
and factors that may have been considered in the process of rating this
issuer can also be found on Moody's website.
Caribe Media, Inc., based in Puerto Rico, owns
directory publishing operating subsidiaries in two Caribbean nations.
In Puerto Rico, Caribe owns 60% of Axesa Servicios de Informacion
S. en C. and Axesa Servicios de Informacion Inc.,
and in the Dominican Republic Caribe owns 100% of Caribe Servicios
de Informacion Dominicana S.A. The company reported revenues
of approximately $102 million for the LTM period ended June 30,
2010. The company is an indirect, wholly-owned subsidiary
of Local Insight Media Holdings, Inc. whose primary owner
is Welsh, Carson, Anderson & Stowe.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
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Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Downgrades Ratings for Caribe Media, Inc; CFR now Caa2
250 Greenwich Street
New York, NY 10007
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