YLO Preferreds Downgraded to Pfd-3 by DBRS; P-4(high) S&P

Yellow Media’s earnings release today contained a lot of interesting news!

In order to improve the financial risk profile and capital position of the Company, the Board of Yellow Media Inc. (Yellow Media) has decided to reduce cash dividends to common shareholders from $0.65 to $0.15 annually

For the quarter ended June 30, 2011, the Company recorded a net loss from continuing operations of $20.7 million compared to net earnings of $53.0 million for the same quarter in 2010, resulting primarily from a loss of $50.5 million related to the investment in Ziplocal. The Company reported a net loss of $14.3 million for the quarter compared to earnings of $52.0 million for the prior year.

Revenues decreased 4.8% from $360.1 million to $342.7 million resulting from lower print revenues as well as lower revenues associated with our US operations. This was partly offset by higher organic online revenues and revenues generated from Mediative and Canpages. Online revenues for the second quarter of 2011 were $85.9 million or approximately $345 million on an annualized basis, representing growth of 33% versus last year. Online revenues now represent more than 25% of total revenues compared to 18% in the second quarter of 2010.
Income from operations was $110.6 million for the quarter compared to $143.8 million in the second quarter of 2010. EBITDA for the quarter declined from $204.0 million to $176.5 million and EBITDA margin for the second quarter was 51.5% compared to 56.6% for the same period last year. The decrease is mainly attributable to print revenue pressure, higher costs associated with Mediative and Canpages as well as investment in the launch of our 360° Solution. The Company also recorded an unusual bad debt expense of $5 million during the quarter.

In response, DBRS downgraded the preferreds to Pfd-3 with a negative trend:

DBRS continues to believe that given the uncertainty regarding Yellow Media’s digital transition and the higher business risk associated with becoming more dependent on digital revenue, it remains prudent for Yellow Media to strengthen its financial risk profile. As such, DBRS notes that the proceeds from the recent close of the sale of Trader ($708 million net, closed July 28, 2011), along with the additional free cash flow from today’s substantial reduction in the Company’s dividend (more than $200 million per year after the dividend was reduced by 77% to $0.15 per share on an annual basis from the previous rate of $0.65 per share), should position the Company well to achieve a reduction of leverage, with debt-to-EBITDA of approximately 2.0 times (currently at the upper end of the 2.0 times to 3.0 times range), which is now a formalized target.

S&P downgraded to P-4(high):

  • Accelerating print revenue declines, increasing margin pressure, and the prospect of increased earnings volatility have led Standard & Poor’s to reassess Montreal-based Yellow Media Inc.’s business risk profile to fair from satisfactory.
  • To mitigate rising industry and competitive risks, Yellow Media has articulated more conservative financial policies, including a 77% reduction in dividends and plans to deleverage to 2.0x (reported net debt basis) from 2.9x at June 30, 2011.
  • The company’s balance sheet improvement does not sufficiently mitigate rising business risks, in our opinion; therefore, we are lowering the ratings on Yellow Media, including our long-term corporate rating to
    ‘BB+’ from ‘BBB-‘.

  • The stable outlook is based on our view that Yellow Media should be able to manage an adjusted debt leverage of 3x in the next couple of years given its plans to repay more than C$1 billion in debt in the near term as well as generate meaningful discretionary cash from its still-sizeable directory operations while it continues to transition its business to online channels.

YLO has four series of publicly traded preferred shares: YLO.PR.A & YLO.PR.B (OperatingRetractible) and YLO.PR.C and YLO.PR.D (FixedReset). All are tracked by HIMIPref™; all are relegated to the Scraps index on credit concerns.

Update: DBRS conference call:

DBRS will be holding a teleconference at 4 p.m. today to discuss its recent downgrade of Yellow Media Inc. (Yellow Media or the Company) to BBB and R-2 (high), with Negative trends. The downgrade reflects DBRS’s concern that the business risk of Yellow Media continues to increase as it accelerates its transition from print to digital, even though there is an expectation of a strengthened financial risk profile going forward as a result of recent actions and the ongoing underlying free cash flow that the Company continues to generate.

The teleconference, hosted by Kam Hon, Managing Director, and Chris Diceman, Senior Vice President, will cover the key analytical considerations in the DBRS rating action and allow for a question-and-answer period.

To participate, please dial the appropriate numbers listed below five minutes before the 4:00 p.m. EDT start time.

Telephone: +1 416 695 7806 or toll-free at +1 888 789 9572
Pass Code: 5637701

A replay will be available immediately after the teleconference until August 18, 2011, at the following numbers:

Available until 11:59 p.m. on August 18, 2011
Telephone: +1 905 694 9451 or toll-free at +1 800 408 3053
Pass Code: 6233388

Update: There was speculation in March that the loss of an investment-grade debt rating (which is what S&P has done) would trigger a dividend cut through covenants on bank lines:

The “hold” camp includes TD Securities analyst Scott Cuthbertson, who published a note this week examining whether Yellow Media’s 65-cent annualized dividend is sustainable.

His conclusion after poring over the financials: Probably, but it’s not a slam dunk.

“Based on our estimates for 2011 and 2012 (which are in line with consensus), YLO should be able to continue to pay its $0.65 dividend from free cash flow in both years,” he wrote.

“With that said, non-operational items such as acquisitions, divestitures, one-time cash charges etc., could potentially put pressure on both the company’s ability to completely fund its dividends through free cash flow and the achievement of recently articulated debt-reduction goals.”

Maintaining Yellow Media’s investment-grade debt rating is critical to sustaining the dividend at current levels, he said. Losing the rating would trigger more restrictive covenants in Yellow Media’s loan agreements, which would put the dividend in jeopardy because the company would be permitted to pay out a maximum of 50 per cent of distributable cash as dividends.

Note that Mr. Cuthbertson changed his views on the company on July 8.

Update: Marc Tellier, the CEO was interviewed on BNN after the close. He was very, very determined to stay on message and very vague on specifics.

Update: What a day for the preferreds. I can’t remember ever seeing anything like it.

YLO Issues, 2011-8-4
Ticker Quote
8/3 – 8/4
YLO.PR.A 20.34-74 18.26-60 29.5% Soft Maturity
YLO.PR.B 13.00-10 8.35-23 30.18% Soft Maturity
YLO.PR.C 12.05-08 8.50-79 19.23% Limit Maturity -29.46%
YLO.PR.D 12.32-50 8.72-9.78 19.29% Limit Maturity -29.22%

Note that the yield figures for YLO.PR.A and YLO.PR.B assume that the retraction right implies a redemption for $25 cash immediately prior to the right becoming effective. Since the minimum conversion price is $2 on the common, and the common now trades for a little over $1.00, many will feel that this is … somewhat optomistic.

However, I note from SEDI that on July 31, the company:

  • Cancelled 77,580 YLO.PR.A, average price 22.43 (about 50,000 bought in July)
  • Cancelled 32,172 YLO.PR.B, average price 15.12 (about 19,000 bought in July)
  • Cancelled 30,644 YLO.PR.C, average price 15.04 (about 18,000 bought in July)
  • Cancelled 14,980 YLO.PR.D, average price 15.17 (about 8,000 bought in July)

10 Responses to “YLO Preferreds Downgraded to Pfd-3 by DBRS; P-4(high) S&P”

  1. beluga says:

    I really want to buy ylo.pr.b after today’s pounding but did the CEO just go on BNN and say, “which will free up $260 million in cash per year – over three years, that’s $850 million.”

  2. […] Canadian preferred share market was also affected, but not to nearly the same degree (unless you own YLO preferreds), as PerpetualDiscounts lost 17bp, FixedResets were down 10bp and DeemedRetractibles were off 10bp. […]

  3. pugwash says:

    Hi Beluga,

    There seems to be more hysteria in the media and markets than yesterdays financials would justify.

    I wonder if it is better to buy the common or YLO.PR.B.

    If I understand it (based on yesterday’s YLO common price) YLO.PR.B will only pay around $14 on retraction – so the common needs to double to get the pref to retract in 2017 at $25.

    The pref maxes at double whilst the common is unlimited – the common has a similar yield to the pref.

    I am sure Mr Hymas will explain the balance of risk with the common vs pref on Monday morning in his excellent Prefletter.

    lets see what today brings.


  4. Whataboutbob says:

    The company bought back 185,200 Pref A shares yesterday, as they resumed buying back all four series of prefs. It would appear they are confident of their cash position, and covenant levels, and are taking advantage of the market weakness.

  5. jiHymas says:

    I am sure Mr Hymas will explain the balance of risk with the common vs pref on Monday morning in his excellent Prefletter.

    A week Monday! The August PrefLetter will be prepared as of the close August 12 for delivery prior to the opening August 15.

    The company bought back 185,200 Pref A shares yesterday, as they resumed buying back all four series of prefs.

    Where do you get this information?

  6. mclachlan8 says:

    James, this data comes from INK Research daily – avail from TD Waterhouse site.

  7. beluga says:

    Thanks all. I’m a subscriber. Let’s see if I have the will power to wait until the 15th.

  8. newbiepref says:

    I think the information comes from the daily insider trading report from the TMX.


  9. jiHymas says:

    I think the information comes from the daily insider trading report from the TMX.


    Oooooh! Very good! I hadn’t been aware of that feature – thank you!

  10. […] is easy to say I should have sold everything then – or at least stopped purchases after the credit downgrades in August – but … I didn’t. While I have been quite cognizant of the fact that credit […]

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