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Rating Action:

Moody's downgrades Yell's ratings to Caa2; outlook negative

20 Apr 2020

NOTE: On April 21, 2020 the press release was corrected as follows: The first sentence of the second paragraph of the press release was changed to “The ratings downgrade reflects Yell's already challenged operating performance which will exacerbate due to the coronavirus related business disruptions in 2020 leading to a significant increase in customer churn with very limited new customer acquisitions during the lockdown period.” Revised release follows.

London, 20 April 2020 -- Moody's Investors Service, ("Moody's") has today downgraded the corporate family rating (CFR) of Owl Finance Limited (Owl Finance) to Caa2 from Caa1, as well as its probability of default rating (PDR) to Caa2-PD from Caa1-PD. Owl Finance is the indirect 100% shareholder of Yell Limited, a leading provider of digital marketing services to small and medium enterprises ("SMEs") in the UK. Moody's has also downgraded the rating for the GBP214.0 million of outstanding backed senior secured notes due 2023 issued by Yell Bondco plc (Yell) to Caa2 from Caa1. The outlook on all ratings is negative.

"The ratings downgrade reflects Yell's already challenged operating performance which will exacerbate due to the coronavirus related business disruptions in 2020 leading to a significant increase in customer churn with very limited new customer acquisitions during the lockdown period. This will lead to a significant deterioration in the company's profitability and credit metrics for the fiscal year (FY) ending 31st March 2021," says Gunjan Dixit, a Moody's Vice President - Senior Credit Officer and lead analyst for Yell.

"The negative rating outlook reflects the pressures that could build on the company's liquidity position, should the coronavirus related disruptions prolong beyond June 2020.", adds Ms. Dixit.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The first nine months of FY ending 31st March 2020, have been materially weak with revenue down 12% year-on year. EBITDA for the first half shrunk by around 24% on the prior year due to the decline in product contribution and investment in additional sales consultants to improve the rate of customer acquisition. Moody's expects the company's reported EBITDA to decline by around 25% year-on-year to GBP44 million for FY ending 31st March 2020.

The first quarter of FY ending 31st March 2021 will be materially weak for Yell with the coronavirus related business disruptions leading to a significant spike in customer churn and very limited new customer acquisitions during the lockdown period. Should the coronavirus related disruptions sustain beyond June 2020, then the company's profitability and credit metrics would come under severe pressure, despite the execution of its planned cost saving measures.

Moody's currently expects a 40% drop in the company's reported EBITDA to around GBP27 million for FY ended 31st March 2021. This is after assuming the cost savings related to (1) the furlough of employees whose roles have been directly affected by the coronavirus disruptions under the government's Job Retention Scheme in order to avoid redundancies; (2) the further group of employees who will work a 4-day week for 80% of their normal salary as well as the UK Senior Leadership Team also taking a 20% salary reduction during this period and (3) other areas of discretionary spend including the termination of temporary staff in non-business critical roles.

The company has entered the lockdown period with a comfortable cash balance of approximately GBP35 million, including the GBP8.75 million drawn recently on its GBP25 million super senior revolving credit facility. Moody's does not expect the company to draw more under the RCF in order to avoid the maintenance covenant test (set at 6.25x net consolidated leverage, tested quarterly when RCF is more than 35% drawn) in view of the expected spike in its leverage. While the company will be materially scaling back its capital expenditure programme, a sustained period of disruptions beyond June could lead to a weakened liquidity profile.

The company's capital structure is becoming increasingly unsustainable, in Moody's opinion. The agency expects a spike in the company's adjusted leverage to over 8.0x for FY ending 31st March 2021. The company's RCF falls due in 2022 while its senior secured bonds fall due in 2023. Given the structural challenges facing the business and the added pressures from the coronavirus related disruptions, Moody's believes that it will be extremely challenging for the company to turnaround its revenues in time to seek a timely refinancing of its capital structure.

Ms. Claire Miles joined Yell as CEO on 1 October 2019 and the company is executing a strategic plan under her leadership, focused on improving the business to better exploit growth opportunities in the market. Moody's cautiously takes into account the significant challenges associated with the successful turnaround of the business especially in a worsening macro-economic backdrop in the UK.

The Caa2 CFR assigned to Yell reflects its: (1) geographical concentration in the UK; (2) relatively small scale compared to global digital advertising players; (3) need to stabilize the audience of Yell.com; (4) continued increase in company's leverage until the business stabilizes its revenues and EBITDA.

The CFR also reflects Yell's: (1) established market position providing digital marketing services to local businesses in the UK; (2) important role in the UK digital ecosystem providing online presence management and digital performance enhancing services to SMEs; (3) subscription model with recurring revenue base; (4) breadth and depth of relationships with search engines, such as Google and social media companies, such as Facebook; (5) nationwide salesforce that represents a barrier to entry.

ESG CONSIDERATIONS

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Digital marketing services companies fall amongst the industry sectors significantly affected by the shock. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Yell (Owl Finance) of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the significant pressures on the company's revenues, EBITDA and credit metrics should the coronavirus related disruptions prolong beyond June 2020.

Stabilization of rating will require (1) a gradual easing of the coronavirus related disruptions after June 2020; and (2) the company to manage its liquidity position during the stress period in a way that it maintains adequate buffer at all times.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the high leverage and need to sustainably turnaround the business in the near term, there is expected to be no upward pressure in the next 12 to 18 months. Upward pressure may arise if: (1) leverage starts moving sustainably towards 5.0x; and (2) the company stabilizes its revenues and EBITDA.

Negative pressure could be exerted if: (1) the company's liquidity profile weakens materially and/ or it agrees with its lenders to miss the scheduled interest payment for September 2020 in the backdrop of prolonged coronavirus related disruptions and an unsustainable capital structure; and (2) Moody's adjusted leverage continues to worsen with no near-term prospects of recovery.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Owl Finance Limited

.... Probability of Default Rating, Downgraded to Caa2-PD from Caa1-PD

.... Corporate Family Rating, Downgraded to Caa2 from Caa1

..Issuer: Yell Bondco plc

....BACKED Senior Secured Regular Bond/Debenture, Downgraded to Caa2 from Caa1

Outlook Actions:

..Issuer: Owl Finance Limited

....Outlook, Changed To Negative From Stable

..Issuer: Yell Bondco plc

....Outlook, Changed To Negative From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Media Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1077538. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Yell is a leading provider of digital marketing services to small and medium enterprises ("SMEs") in the UK, helping SMEs to build and maintain an effective online presence and facilitating interaction with consumers. It achieves this through its online business directory, Yell.com, and by providing around 110,000 SMEs with a range of digital marketing solutions (including, for example, website creation and maintenance and / or social media, AdWords, video or display advertising campaigns).

As of LTM period ended December 2019, Yell UK reported revenue and EBITDA (as calculated by management) of GBP172 million and GBP50 million, respectively. Yell has been created as a separate UK restricted group by means of a corporate reorganization at Hibu Group Limited. The reorganization legally separates the UK and US businesses of Hibu Group Limited.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

Gunjan Dixit
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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