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Rating Action:

Moody's downgrades Yell to B3; outlook negative

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.

RATINGS RATIONALE

"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 flow generation.

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 June 2009.

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) was GBP619.6million.

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
Gunjan Dixit
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

Moody's Investors Service Ltd.
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United Kingdom

Moody's downgrades Yell to B3; outlook negative
No Related Data.
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