YLO: Banks Tighten the Screws

Yellow Media Inc. has announced (bolding added):

  • Company will record a goodwill impairment charge of $2.9 billion
  • Company eliminates future dividends on its common shares
  • Company agrees to amend credit agreement following recent downgrade to its credit ratings
  • Company decisively reduces debt while maintaining adequate liquidity
  • Company is focused on executing its 360 Solution digital strategy

Montreal (Quebec), September 28, 2011 – As announced in the second quarter, Yellow Media Inc. (TSX: YLO) determined that, depending on the outcome of the review of its strategic and operating plans, the fair value of the Company’s assets may be determined to be less than their carrying value. As a result, the Company tested the goodwill and other long-lived assets related to its business for potential impairment. The impairment testing has now been completed and, as a result, the Company will record a goodwill impairment charge of $2.9 billion in net earnings for the period ending September 30, 2011.

This impairment charge is a non-cash item and does not affect the Company’s operations, its liquidity or cash flow from operating activities, its bank credit agreement or its note indentures. This charge will be reflected in the Company’s financial statements for the period ending September 30, 2011. It is the result of a combination of factors, including the decrease in the Company’s common share price and the pressure on EBITDA due to the accelerated transition from print to online, the uncertainties, if or when, new product introductions will compensate for the declining trend in print revenues and the lower margins from recent business acquisitions.

“We are decisively taking action to reduce our debt. The Board, the management team and all our employees are focused on the successful transformation of Yellow Media toward a digital media company through the execution of our 360 Solution strategy,” said Marc P. Tellier, President and CEO of Yellow Media.

Dividends on Common Shares to be Eliminated

The Yellow Media Board of Directors has determined that it is in the best interest of the Company to eliminate future dividends on its common shares. This decision is in compliance with the amendments that the Company has agreed to make to its principal credit agreement and will improve its financial profile and capital position. The $0.025 dividend per common share that was previously declared by the Company and announced on August 4, 2011 remains payable on October 17, 2011 to shareholders of record at the close of business on September 30, 2011. The cash retained from the elimination of dividends will be used to reduce indebtedness.

Yellow Media is committed to improving its financial position through further debt reduction by pursuing a prudent financial policy and by maintaining a capital structure that provides flexibility through diverse funding sources and timing of its debt maturities. Management’s current focus is to reinforce the Company’s financial foundation upon which to execute Yellow Media’s digital transformation. Yellow Media expects to achieve stronger credit protection measures through sustained cash flow generation and deleveraging of its balance sheet.

With the debt repayment announced today, the Company will have reduced its total indebtedness by approximately $700 million during the quarter (representing the amount of net proceeds from the previously announced sale of Trader Corporation), including the repayment of $238 million principal amount of Medium Term Notes.

Amendments to Existing Credit Agreement

As a result of the recent downgrade of its credit ratings, Yellow Media and its lenders have agreed to amend the terms of its principal $1 billion senior unsecured credit facility, which currently consists of a $750 million revolving term loan and a $250 million non-revolving term loan, each maturing on February 18, 2013. Yellow Media has agreed with the unanimous support of the banks forming part of the syndicate of lenders under the principal credit facility to repay a total amount of $500 million of its bank indebtedness and to reduce the committed size of the revolving term loan from $750 million to $250 million. The committed size of the non-revolving term loan remains unchanged. As a result, upon the effective date of the amendments, the new principal $500 million senior unsecured credit facility will consist of a $250 million revolving tranche and a $250 million non-revolving tranche, each maturing on February 18, 2013.

The Company has agreed to make quarterly payments of $25 million on the non-revolving term loan commencing in January 2012. Pursuant to the amendments, Yellow Media has also agreed to suspend future dividends on its common shares, except for the scheduled dividend payment on October 17, 2011.

Upon the downgrade of its credit ratings announced on August 4, 2011, Yellow Media became subject to a restriction contained in its credit agreement that limits the aggregate amount of excess cash that can be paid as dividends and for the repurchase of securities during any trailing 12-month period. As part of the amendments, Yellow Media is receiving a waiver of this distribution restriction in respect of the prior 12-month period.

A copy of the second amended and restated credit agreement will be available on www.sedar.com.

Whoosh! There’s nothing on SEDAR yet, but presumably it will be there by the weekend.

The impairment is trivial – YLO’s balance sheet has never been worth anything. As I remarked in the August PrefLetter, the business is all about relationships and turning those relationships into cash – it’s always been the statement of cash flows that has been important. If it were not for everything else in the release, the writedown could be dismissed as an effort by the new CFO (introduced on September 6) to put her mark on the company. But there were other things in the release…

What is important is that not only has the size of the revolving term loan been reduced to $250-million from $750-million, but that YLO has agreed to pay down the term loan in advance, in $25-million installments. Further, they do not appear to have got anything in exchange for these concessions – a longer term on the facilities would have been nice.

I remarked in PrefLetter that the important thing to watch for was any signs that the company might be losing access to the capital markets. Well … an important thing may have just happened.

It is also somewhat scary that they’ve eliminated the dividend. I’ve been saying since the 11Q2 report that the best thing that happened to preferred share and debt holders was the downgrade, as that forced a dividend cut under the old credit agreement – only a CEO educated at Lower Canada College or a sell-side analyst could possibly have thought the old rate was sustainable and the downgrade forced a little dose of reality into the company’s opium dreams. But total elimination? That’s a very stringent condition.

I don’t think the preferred dividend is at risk – companies will typically only eliminate their preferred dividends when they’re actually standing on the steps of bankruptcy court and cash flow is still positive. However, the probabilities of conversion of YLO.PR.A and YLO.PR.B into common at the earliest opportunity (March 2012 for the former; June 2012 for the latter) have now risen quite sharply.

The next big step is the 11Q3 results. The note about the “declining trend in print revenues and the lower margins from recent business acquisitions” makes it possible to speculate that revenues have fallen off a cliff.

In addition to the two retractibles, YLO.PR.A and YLO.PR.B, the company has two FixedResets outstanding, YLO.PR.C and YLO.PR.D, which are not convertible into common.

4 Responses to “YLO: Banks Tighten the Screws”

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  3. […] Unitholders and casual readers will know that these issues have been a nightmare for me since the renegotiation of their bank credit facilities in September. With the benefit of hindsight, it is easy to say I should have sold everything then – or at […]

  4. […] of September 28, 2011? That was the date the banks tightened the screws and DBRS slashed the rating. But why it’s being used as a reference date for the […]

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