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Global Credit Research - 29 Nov 2010
London, 29 November 2010 -- Moody's Investors Service has today downgraded Yell Group Plc's
corporate family rating (CFR) to B3 from B2 and its probability-of-default
rating (PDR) to Caa1 from B3. The outlook on the ratings is negative.
"Moody's downgrade of Yell's CFR to B3 and the negative
ratings outlook reflect: (i) the recessionary and structural pressures
faced by the company, leading to continued marked deterioration
in its operating performance; and (ii) the lack of visibility with
regard to the likely timing of a meaningful and sustained recovery in
Yell's operating performance, which remains closely linked
to the return of confidence amongst small and medium-sized enterprises
(SMEs)," says Gunjan Dixit, the lead analyst for Yell.
Having registered a decline in revenues of 14% at constant currencies
in FY 2009/10, Yell's revenues fell by 11% in H1 2010/11.
While the decline in Yell's revenues in Q1 2010/11 was in line with
the company's guidance at around 11%, the drop in revenues
in Q2 2010/11 was worse than its initial guidance, at 12%.
The revenue decline remains in particular driven by the continued difficult
economic environment in Yell's operating markets which is forcing
SMEs to delay their investments in marketing efforts. In addition,
structural pressures on Yell's business associated with the transition
to online advertising continue to pose challenges. Moody's
notes that the company has revised its revenue guidance for Q3 2010/11
downwards to around 12% (on an organic basis at constant currencies),
from its original guidance of 9% for the quarter. Moreover,
the company does not expect there to be any improvement in its revenues
in Q4 2010/11 from Q3 2010/11.
The rating agency acknowledges that amid a particularly difficult operating
environment, Yell has continued to invest in the business to keep
pace with changing customer requirements, in line with its business
strategy. This is reflected in the increased capital expenditures
as a percentage of sales (at 4.9%) in H1 2010/11 year-on-year
and management guidance of an increase in this ratio to c. 3%
to 4% from historical levels of c. 2.5%.
Internet growth has been the main area of investment, with a focus
on the development of the website design product for SMEs, acquisition
of increased search engine traffic, and improving mobile internet
usage through the launch of new products. Whilst Moody's
recognizes the merits in Yell's strategy, in the agency's
opinion, it currently remains extremely difficult to assess (i)
the degree (and sustainability) of demand take-up for such products
over time as well as (ii) Yell's medium to long-term competitive
position in the online as well as the mobile market segments.
Moody's notes that Yell has maintained its focus on cost control
and cash conservation. During H1 2010/11, Yell was able to
maintain its adjusted EBITDA margin (as defined by Yell) at around the
same level as the previous year -- approximately 30% --
largely as a result of its cost-control measures. Moody's
also notes that company remains confident of achieving adjusted EBITDA
(as defined by Yell) of around GBP530-540 million at current exchange
rates, helped by additional restructuring steps planned in H2 2010/11.
Although Yell reported a net debt/EBITDA ratio of 4.9x for the
last 12 months ending 30 September 2010, the rating agency expects
this ratio to trend close to 5.5x by the end of FY 2010/11.
Yell enjoyed comfortable headroom of 29% under its bank financial
leverage covenant at the end of September 2010. However,
as the covenants begin to step down from September 2011 onwards,
Yell's covenant headroom is also likely to tighten rapidly if the
declines in the company's revenues and EBITDA continue unabated.
Moody's regards Yell's current liquidity position as adequate
for its requirements. The company had cash and cash equivalents
of GBP261 million as of 30 September 2010. In addition, Yell
benefits from GBP197 million worth of largely undrawn and committed revolving
credit facilities (due in 2014). Moody's notes that,
despite the tough operating environment, Yell has been generating
meaningful free cash flow (GBP161 million before exceptional items in
H1 2010/11) and the company's cash conversion rate stood at 115%
in H1 2010/11. Following the completion of its equity increase
and the refinancing of the majority of its senior credit facilities in
late 2009, Yell has only moderate amounts of debt amortisation (approximately
GBP103 million due in the next 12 months excluding excess cash flow sweep)
until 2014. Given the current share price, Moody's
believes that access to any additional equity funding would prove challenging
for the company.
Moody's notes that Yell remains focused on using the majority of
its internally generated cash flow (including most of the existing cash
on balance sheet) for debt reduction over the short to medium term.
What Could Change the Rating -- Down
Downward pressure on the ratings could result from continued decline in
Yell's revenues and EBITDA leading either to a deterioration in
Gross Debt/ EBITDA (as defined by Moody's) of around 6x and/or a
significant reduction in bank covenant headroom.
What Could Change the Rating -- Up
While upward rating pressure is unlikely in the short term, over
time it could result from (i) a visible and sustained recovery in Yell's
revenue and EBITDA growth, with a commensurate improvement in the
Gross debt/EBITDA (as defined by Moody's) at or below 5.0x
and continued improvement in the ratio going forward (with meaningful
bank covenant headroom at all times); and (ii) healthy free cash
Moody's assigned Yell'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 Yell;
(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 Yell'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
Moody's most recent rating action on Yell was implemented on 23
November 2009, when the rating agency confirmed the company's
B2 CFR and B3 PDR.
Yell Group plc is the leading publisher of classified directories in the
UK and, through its subsidiary, Yellow Book, is a leading
independent directories publisher in the US. Yell also owns 100%
of TPI (renamed "Yell Publicidad"), the largest publisher
of yellow and white pages in Spain, with operations in certain countries
in Latin America. Yell's revenue for FYE 31 March 2010 was
GBP2.1 billion and its adjusted EBITDA (as defined by the company)
Information sources used to prepare the credit rating are the following:
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and proprietary Moody's Investors Service information.
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The rating has been disclosed to the rated entity or its designated agents
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Please see ratings tab on the issuer/entity page on Moodys.com
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Corporate Finance Group
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Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
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Moody's Investors Service Ltd.
Moody's downgrades Yell to B3; outlook negative
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