Yellow Media restated credit facility – can they survive?

As Yellow Media’s shares (preferred and common) continue their descent to zero, they did release what was in their restated credit facility (attachment).

Notably are the following:

1. Article 8 covenants are fairly obvious – the company must report annual and quarterly statements in compliance with GAAP, etc. There is a reference to budgets and projections (8.1 (c) and (d)) that will likely mean that the creditors will have material information that the public does not have. Probably the same people dumping the preferred shares well in advance of this calamity!

[8.1 (d)] (x) a breakdown of print and online revenues, (y) distributable cash flow and distribution calculations and (z) expected revenue drivers and which projections should be in a format consistent with the September, 2011 Projections.

Also 8.10 requires the company to include more guarantors to the creditor agreement which are subsidaries of the company.

2. Article 9 covenants are more restrictive. They prohibit the taking out of further debt unless if under the credit agreement, except for minor items including capital lease obligations no greater than $25M, and also other minor conditions including intra-company debt;

9.3 prevents the company from acquiring or liquidating companies without being able to satisfy the existing covenants on a pro forma basis;

9.4 requires the company to remit any proceeds above $25M in a sale to the creditors necessary to achieve compliance with covenants on a pro-forma basis;

9.5 is the salient clause – it prohibits distributions to common shareholders (except for the last 2.5 cent common dividend upcoming), but includes the following clause:

(iv) the Borrower may declare and pay dividends on the preferred shares of the Borrower existing as at the date hereof,

This would suggest, as long as the company can make its other covenants that the preferred shares will continue paying dividends.

The important covenants, the performance-related ones, are the following:

9.7 Consolidated Total Debt to Consolidated EBITDA Ratio
The Borrower will not permit the Consolidated Total Debt to Consolidated
EBITDA Ratio for any Test Period beginning with the first Test Period ending after the Closing
Date to be greater than the ratio of 3.50 to 1.

9.8 Consolidated EBITDA to Consolidated Interest Expense Ratio
The Borrower will not permit the Consolidated EBITDA to Consolidated Interest
Expense Ratio for any Test Period beginning with the first Test Period ending after the Closing
Date to be less than the ratio of 3.5 to 1.

9.7 is a stronger covenant than 9.8; using the first half of 2011 results as a measure of these two, the company’s ratios would be as follows:

9.7: EBITDA (12-month extrapolated, realizing this is a flawed extrapolation) $366.5M*2 = $733M, debt at June 30, 2011 is $2.39B, for a ratio of 3.26:1. There was a large amount of debt paydown for the Trader Corporation sale, but the larger risk is the EBITDA number.

9.8: EBITDA: $366.5M for the first half; $84.6M in financial charges for the first half, for a ratio of 4.33:1; the financial charges going forward will be less due to the repayment of MTN’s, but the obvious risk here is the decreasing EBITDA;

The raw math boils down to the following: Can YLO keep its head above the EBITDA water? With the Trader Corporation sale, the company will have about $1.7B in debt to worry about, which means that its ultimate concern is being able to generate about $480M in EBITDA on an annual basis (or less if it continues to pay down debt). At present when you extrapolate the trajectory that its EBITDA is declining (2009: $903M, 2010: $860M, 2011: $366.5M in the first half), can they level it off at about 40% less than its 2009-2010 run rate?

If so, the company can survive its credit facility. If not, there will be a default.

High risk, high reward.

The optimistic scenario is if they can stem the decay and be able to survive its credit facility – I would guess that the preferred shares in such a case would trade around $17-18 if there is clear evidence that this is happening. Obviously we do not see any of that evidence currently and the next quarterly report is just as likely to be brutal.

Students of history will also remember that when Nortel was going through its preliminary death throes in 2002, they were contemplating restructuring and their preferred shares went down to about $1-2 before finally coming back up again. I remember that quite distinctly although I never purchased into Nortel preferreds back then. The analogy is not appropriate to this case (different business, different situation) but what is salient is that low prices give high risk, high reward type situations – there are many scenarios where it is likely that the preferreds of YLO will go to zero, but there are plausible cases where they will rise again.

This is why you never ever put significant fractions of your portfolio into picks that are high risk like this one – keep the bets tiny. At this point it’s really tough to distinguish between investing and gambling. Just as a point of reference, if you put 2% of your portfolio into a play like this and it goes up 10-fold (which the low-probability winning scenario is for the preferred shares if the company actually manages to get its act together), that 2% position will be a 20% position at the end of the day if you do not rebalance.

Just remember the likely scenario is that the 2% goes to zero!

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Excellent analysis — did not yet have time to read in detail, but did want to point out that there is of course a 334Million savings per year vs the previous common dividend level. This alone is equivalent to 70$ of your 480M EBITDA figure above.

thanks

Sasha, can you advise where you were able to get the restated credit facility agreement?? I had no idea such information was available to the public. I am a MTN bond holder and find the information extremely informative (and positive, as YLO needs to be on a short leash for their own good !)

thanks

just a couple of notes:

On the interest side one can calculate the main savings. For the bank LOC paydown of 500 million at 3.6% (B.A plus 2.5%) the 6 months savings is about 9 million. They have also stated they paid down 238 million of MTN (Not sure if this is face value or purchases as they bought at a discount. From Sedar I had calculated 231 million paid for 258 million of debt). The majority being in the series 4 at about 80 million at 5.25% and the other in Series 7 at 144 million at 7.3%. Those two would combine for a 6 months reduction in interest of about 7.4 million. So the 6 month interest should drop from 84.6 to about 68.2 million from the 9 and 7.4 million numbers or a coverage of 5.4.

The other point is the EBITDA for 2010. In the 2010 annual report they show the 860 million. However that includes Trader and uses GAAP. If you go to page 8 of the Q2 management and discussion analysis they show the adjusted EBITDA of the 4 quarters for 2010 without Trader and under IFRS. It is about 757 Million. Although we still need to see Q3 and Q4 if it stays similar to Q1 and Q2 combined then multiplying by 2 one gets 732 million of EBITDA. Just as an additional FYI the revenue for 2010 without Trader and under IFRS is 1.4 Billion and for the first 6 months of 2011 is 692 million or 1,384 Billion. Again these calculations depend on Q3 and Q4 being close to Q1 and Q2.

I hope my calculations are correct and feel free to let me know if I have any mistakes as I am not an accountant.

Best regards,

John

Wow, thanks for the quick reply.

I will have to redo my Sedi calculations but the MTN interest savings is pretty close, Your number is 7.5 Million for the 6 months and I had 7.2 million.

A quick question when you have a chance. Is my calculation of the interest saved on paying down the LOC close? I used an unconfirmed source for the 3.6% (B.A. plus 2.5% would mean B.A. is 1.1%). I had calculated 500 million (I think it is more like 386 million LOC plus 108 million commercial paper) times 3.6% and divided by 2 for the 6 months. That was 9 million in addition to the 7.5 million.

Sorry if it seems a bit picky but it raises the EBITDA to interest coverage from 4.3 to 5.4.

Thanks again for the reply.

Not sure what the debt level is at Sept 30, 2011?

At June 30, 2011 the statements indicate debt of 2.28 B (not sure where the 2.39 above derives from?) Debt has since been reduced by (500M) with the Banks, plus (233M) in MTN buybacks for a total of (733M).

Does this not imply that the debt at Sept 30, 2011 should be only around 1.55 B
— not the 1.7 B indicated above ?

Good question. The way they calculate the debt they have to include the convertible debentures which consist of a debt and equity component. Even though they are trading at 20% of face value they have to be counted as face value. The debt component on them is 183 million (of a 200 million issue) as of the Q2 report. When I was trying to figure out the debt ratios (Tellier stated he wanted to get to 2 times EBITDA so I wanted to see how far was needed to go, the Q2 report said 2.9, he said on BNN 2.8 to 3.3 and BMO was saying 3.8) The debt number I used was 2.5 Billion less the buybacks and the rest of the cash from trader. I calculated around 1.83 Billion of debt. This does not include the preferred shares. The 1.7 might not include the commerical paper at 108 million but I did for the 1.83 number. Commerical paper was listed in a different debt section so it may not count towards the debt for the ratios. By the way I am not an accountant and I didn’t make the rules. One other jewel that makes this extra fun is they changed the accounting rules from GAAP (generally accepted accounting practices) to something called IFRS (International blah blah standards) so all the companies in Canada have spent money on changing their systems and on having to go back and restate the past. If you look in the Q2 MD&A report on page 8 you will see the correct numbers with Trader out and new IFRS accounting standards.

Sorry, probably more than you wanted to know. Let me know if you want the ratios and I will post. Kind of eye opening.

Cheers,

Thanks for the fast response

Cheers !

Is a class action next ?