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Rating Action:

Moody's assigns Caa1 corporate family rating to Dex Media

10 Jun 2013

New York, June 10, 2013 -- Moody's Investors Service ("Moody's") assigned a Caa1 corporate family rating and a Caa1-PD probability of default rating for Dex Media, Inc. ("Dex Media" or "the company"). The ratings agency also assigned a Caa3 (LGD6-95%) rating to Dex Media's senior subordinated notes due 2017, a Caa1 (LGD3-45%) rating to the term loans of R.H. Donnelley Inc. ("RHDI"), Dex Media West Inc. ("DMW"), Dex Media East Inc. ("DME"), SuperMedia Inc. ("SuperMedia") and a SGL-2 speculative grade liquidity rating. The rating outlook is negative.

Moody's has taken the following rating actions:

Issuer: Dex Media, Inc.

Corporate Family Rating -- Assigned Caa1

Probability of Default Rating -- Assigned Caa1-PD

Outlook -- Negative

Speculative Grade Liquidity Rating -- Assigned SGL-2

Senior Subordinated Notes due 1/29/17 -- Assigned Caa3, LGD6-95%

Issuer: R.H. Donnelley, Inc.

Outlook -- Negative

Senior Secured Term Loan due 12/31/16 -- Assigned Caa1, LGD3-45%

Issuer: Dex Media West, Inc.

Outlook -- Negative

Senior Secured Term Loan due 12/31/16-- Assigned Caa1, LGD3-45%

Issuer: Dex Media East, Inc.

Outlook -- Negative

Senior Secured Term Loan due 12/31/16 -- Assigned Caa1, LGD3-45%

Issuer: SuperMedia Inc.

Outlook -- Negative

Senior Secured Term Loan due 12/31/16 -- Assigned Caa1, LGD3-45%

RATINGS RATIONALE

Dex Media's Caa1 corporate family rating ("CFR") is supported by its position as the second largest print and digital yellow pages business in the U.S., modest EBITDA margins, low capital intensity, and the company's ability to generate relatively predictable, albeit declining, levels of free cash flows. These strengths are offset by the company's highly leveraged capital structure, a fairly rapid structural decline in the print directory segment, difficulties growing the digital business, expanding competitive challenges and very low barriers to entry in digital advertising. Finally, a prior history of the company opportunistically repurchasing debt at a discount (which Moody's considered distressed exchanges) weighs on the rating. Moody's believes that purchases at a discount are likely in the future since the company amended its bank covenants to make it possible to repurchase additional bank debt on the open market through the end of 2016.

Dex Media is attempting to reinvent its business by reducing its reliance on print advertising through the development of digital and mobile directory service applications. However, we have doubts that the company will be able to transition its business away from a reliance on print directories quickly enough to stabilize its revenues and earnings. It also remains to be seen whether the business model is viable. We project double-digit declines in net revenues and declines in EBITDA of about 10% in both 2013 and 2014. We also expect that the relatively robust levels of free cash flow that the company is currently generating will decline at an accelerating pace over time. Dex Media will continue its focus on reducing costs to maximize operating efficiency. Offsetting some of the revenue decline and margin pressure is the company's expected annual run-rate expense synergies of about $150-175 million, which are expected to be fully realized in 2015, and $200-275 million of cash flow due to the preservation of Dex One tax attributes.

The senior secured term loans at RHDI, DMW, DME, and SuperMedia are all rated Caa1 (LGD3-45%) reflecting their structural seniority to Dex Media's $220 million of senior subordinated notes. The subordinated notes are rated Caa3 (LGD6-95%) and would likely experience meaningful loss in the event of another default. The company is restricted from making open market repurchases of its subordinated notes during the credit agreement period and is required to PIK half of the interest on these securities. Each of the credit facilities are separate facilities with no cross guarantees or collateralization provision among the entities, subject to certain exceptions. The Shared Guarantee and Collateral agreement has certain cross guarantee and collaterization provisions among Dex entities, but excluding SuperMedia and its subsidiaries. However, an event of default by one of the entities could trigger a call on the applicable guarantor. An event of default by a guarantor on a guarantee obligation could be an event of default under the applicable credit agreement, and if demand is made under the guarantee and the creditor accelerates the indebtedness, failure to satisfy such claims in full would in turn trigger a default under all of the other credit facilities. A subordinated guarantee also provides that SuperMedia and each significant Dex entity guarantees the obligations of the other such entities, including SuperMedia, provided that no claim may be made on such guarantee until the senior secured debt of such entity is satisfied and discharged.

The SGL-2 speculative grade liquidity rating reflects Dex Media's ability to service its required debt amortizations and excess cash flow sweep payments at each of its subsidiaries and approximately $340 million of projected free cash flow in 2013. Free cash flow generation is critical to liquidity and the Caa1 CFR due to the absence of a revolver. Moody's anticipates DMW, DME and RHDI will have at least a 15% EBITDA cushion within the financial maintenance covenants over the next 12-18 months.

The negative rating outlook reflects Moody's expectation that Dex Media will opportunistically repurchase debt at a discount in the future.

The ratings are unlikely to be upgraded due to the secular decline of the print business and low barriers to entry in the digital segment.

The ratings could be lowered if the print business erodes faster than expected (about 20% per year) and the digital business fails to grow, leading to a more-than-expected rapid decline in free cash flow and less debt reduction, or if leverage (Moody's adjusted) remains above 3.8x.

The principal methodology used in this rating was Global Publishing Industry published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dennis Saputo
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Caa1 corporate family rating to Dex Media
No Related Data.
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