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Rating Action:

Moody's downgrades Seat Pagine Gialle to Caa1; Outlook negative

29 Nov 2010

London, 29 November 2010 -- Moody's Investors Service has today downgraded to Caa1 from B2 the corporate family rating (CFR) of SEAT Pagine Gialle SpA ("SEAT"). Concurrently Moody's has downgraded to B3 from B1 the rating on SEAT's EUR550 million senior secured notes due in 2017 and to Caa2 from Caa1 the rating of its EUR1.3 billion 8% senior notes due 2014, issued by Lighthouse International Company SA. The Outlook on the ratings is negative.

RATINGS RATIONALE

The two-notch CFR downgrade to Caa1 reflects Moody's view of (i) the challenges that the industry faces stemming from a continued structural decline in the print-directory segment; (ii) the challenges SEAT faces in its efforts to curb the resulting negative pressure on its revenues and EBITDA from a loss in customers, by shifting its business model towards local on-line advertising and marketing services in Italy; (iii) a highly leveraged capital structure, with a debt/EBITDA ratio of around 6.0x; (iv) the refinancing risk that arises from the need to repay debt falling due from 2012 under the senior credit facilities and the associated high funding costs and; (v) potential liquidity pressures arising from the need to fund part or all of the receivables under SEAT's asset-backed securitisation programme, which will be terminated in June 2011.

In the nine months of September 2010, SEAT reported an acceleration in the decline in revenues from the print advertising segment when compared to 2009, to over 20% while at the same time a strong acceleration in the growth from on-line advertising revenues to over 50%, notably thanks to its aggressive sales strategy of multimedia packages at lower price entry points. Italian core revenues declined by 5.9% in the period.

SEAT's strategy focuses on: (i) stabilising its declining customer base; (ii) bringing innovative services to market; (iii) continuing to pursue cost-cutting measures; and (iv) implementing working capital optimisation in order to preserve cash flows. Moody's understands that SEAT's commercial strategy may have to be achieved at the expense of a lower ARPA (average revenue per advertiser) as the company intends to increase penetration of local on-line advertising and marketing services, by enhancing the range of price-entry points. Once SEAT's customer base stabilises, the company will benefit from better scope to market additional products and services and build growth in the business.

Whilst Moody's recognises the merits in SEAT's business strategy, the rating agency believes that: (i) it entails execution risk, particularly given the significantly higher degree of competition and still relatively low market share of SEAT in the local on-line marketing business; and (ii) could take some time to translate into revenue and EBITDA growth. In Moody's view there is still limited visibility with regards to the evolution of the markets in which SEAT operates and the company's ultimate competitive position in the on-line segment.

Moody's expects SEAT's leverage to remain high at the end of 2010, reflected by a debt/EBITDA ratio around 6.0x. Moreover, in the rating agency's view, the potential for de-leveraging over 2011 is limited. Given the need for SEAT to repay significant amounts of debt from 2012 onwards, Moody's understands that the company will have to undertake major refinancing steps which might come at a cost, potentially further weighing on the company's limited free cash flow generation capacity. The ratings of SEAT reflect the possibility that, over the medium term, the company may need to revise its capital structure such that it is more sustainable, in the context of the trends and challenges the business currently faces.

The negative outlook on SEAT's ratings reflects the ongoing pressure on the company's business and liquidity profiles.

Moody's would consider a further downgrade of the ratings if: (i) SEAT were to experience continued pressure on its revenue, EBITDA and free cash flow generation; (ii) the company's liquidity were to become clearly impaired, potentially arising from the need to fund working capital requirements as a result of the termination of its securitisation programme; or (iii) there were clearer signs that SEAT were unable to avoid a restructuring of its current capital structure, which would lead to losses for the company's creditors. A downgrade of the ratings could also occur if the company does not de-leverage over the next 12-18 months such that its debt/EBITDA ratio is 5.5x or below.

In Moody's view, a positive rating action is currently unlikely. However, to achieve positive rating pressure over the longer term, SEAT would need to successfully turn around the business and address its significant refinancing needs from 2011 onwards.

Moody's assigned SEAT's ratings by evaluating factors that the rating agency believes are relevant to the credit profile of the issuer, such as: (i) the business risk and competitive position of SEAT; (ii) the capital structure and financial risk profile of the company; (iii) the projected performance of the company over the short to medium term; and (iv) management's track record and tolerance for risk. Having compared SEAT's attributes with those of other issuers both within and outside of its core industry, Moody's believes the company's ratings to be comparable to those of other issuers of similar credit risk. The principal methodology used in this rating was Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Moody's previous rating action on SEAT was implemented on 18 January 2010, when the rating agency assigned a provisional (P)B1 rating to the proposed senior secured notes, due in 2017.

Headquartered in Turin, Italy, SEAT is the leading publisher and provider of directory services in Italy and, through its wholly-owned subsidiary, TDL, is the number three directories publisher in the UK. SEAT also has a presence in Germany through Telegate, the second-largest player in the German directory-assistance market.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

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 for further information.

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.

London
Alexis Foret
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Chetan Modi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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Moody's downgrades Seat Pagine Gialle to Caa1; Outlook negative
No Related Data.
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