I notice that Yellow Media did not announce it was suspending interest payments on its convertible debentures (TSX: YLO.DB.A). If they would have done so it would have guaranteed them going into creditor protection.
They have about 11 months to figure out a solution to their imminent debt situation before they will go into default. The medium term notes (which are equal in level to the bank debt in seniority) trade at around 50 cents on the ask at present. The convertible debentures (junior to the MTNs and bank debt) are at about 12 cents on the dollar, while preferred shares are at about 3 cents on the dollar.
The logical investment conclusion is to buy the MTNs if you believe the entity has value after restructuring, or buy the preferred shares if you believe there will be a hugely messy process but not something that wipes out the preferred shareholders. The “middle ground” debentures will probably profit less than the preferred shareholders if there is some sort of recovery.
Presuming Bank Debt, MTN and/or Convertible Debt take a haircut, I’m sure they won’t leave much on the table for Common or Preferred. I think Convertible will recover much more than Perferred… sure Perferred is a lot cheaper and returns could be a lot higher, but it’s really at the mercy of other stake holders.
In the Supplemental disclosure (P.12) to the Q4 financial statements, analysts estimates of 2012 EBITDA are published.
http://www.ypg.com/images/ckeditor/files/2011_Q4_SuppDisc.pdf
The low estimate is $558 million from which $110 million for interest, $125 million for income taxes and $100 million for required payments on the non revolving line of credit are subtracted leaving about $225 million available for business expansion or debt buybacks. Key item to notice is that Yellow Media remains profitable and is paying income taxes. If Superior Plus can renew with minor reduction Bank credit facilities why does the market not expect the same for Yellow Media?
“SUPERIOR PLUS CORP. EXTENDS ITS SYNDICATED CREDIT FACILITY
Superior Plus Corp.’s wholly owned subsidiaries, Superior Plus LP, Superior Plus US Financing Inc. and Comercial E Industrial ERCO (Chile) Ltda., have completed an extension of their syndicated credit facility with eight lenders. The size of the facility was reduced to $570-million from $615-million. The syndicated credit facility was reduced to reflect Superior’s anticipated credit requirements as a result of Superior’s continuing debt reduction plan. The secured revolving credit facility matures on June 27, 2015, and can be expanded up to $750-million. Financial covenant ratios were unchanged, with consolidated secured debt to consolidated earnings before interest, taxes, depreciation and amortization ratio, and consolidated debt to consolidated EBITDA ratio of 3.0 times and 5.0 times, respectively.”
The simple answer is that Superior Plus is in an industry that isn’t being annihilated through technological change.
Yes, the print directory business is declining at a predictable rate, BIA Kelsey, Local Search Association and the relatively few players in the world directory industry have all given guidance on the decline. But what about the growing side of the Local Search business, why is it that Google has partnered with Yellow Media in Canada and others world wide. Is it realistic to assume that Google with 300 employees in Canada can meet the needs of SME’s in Canada? Mediative, owned by YPG is one example of this growing business.
http://www.mediative.ca/about
Yell Group in the UK and DexOne in the US have been successful in buying back debt at cents on the dollar, YPG was expressly permitted in the September bank line reorganization to do the same.
How do you get 11 months before they go into default? Are you talking about Feb 2013 when the LOC’s are due? Remember they pulled 239 million out of the LOC and are sitting on it in cash (Total cash at Feb 9 was 280 million). The NRT is now down to 155 million (since we didn’t hear contrary I assume they made their 25 million payment on April 1 or 2). They don’t need to spend the 239 million on capex (as far as we know they are still cash flow positive) and they cannot buy back any debt. That leaves 3 more 25 million payments and an 80 million balloon payment. So for the year from Feb 9 2012 to Feb 2013 (don’t have the exact date) they need to make another 115 million. Their Free Cash flow would have to drop from 337 million last year to 115 million to default or a 66% drop in FCF. The next payment is 125 million in June and the next is 130 million in December. So overall for them to default anytime to the end of 2013 they have to fall below 185 million for 2012 and 2013. That would be a 45% decline in FCF from 2011 to 2012 (didn’t scale to 2013 but I think I made my Point). So unless the bottom really falls out then there appears to be no trouble until 2014. Perhaps my math is wrong or my assumptions are wrong or they will surprise us once again negatively. Feel free to correct any points as I am not trying to defend them just trying to look at the facts as are known. Also used FCF not EBITDA and would be happy to elaborate on print declines vs. online increases modelling.
Don’t Write that Obituary Just Yet…Print is Alive and Well!
arybczynski – Thursday, April 12, 2012
When I joined DAC Group’s research department six years ago, one of the tasks that landed on my desk was to track monthly the number of Yellow Pages directories in print in both the U.S. and Canada. I never gave the task much thought, but the figures recently have been hard to ignore. The U.S. is now at its lowest directory count in over seven years. North of the border, in the wake of Yellow Pages Group’s acquisition of their top competitor, CanPages, Canada’s directory count is nearly a hundred directories less than when we first began tracking in 2003, and more than 150 directories less than its peak over three years ago.
While this may sound like bad news for the industry, it’s not. The directory explosion that occurred during the second half of 2008 made Yellow Pages a bigger business than ever, but it also led to a lot of confusion for the folks who came home to half a dozen directories on their front step. Who could blame them for tossing the extras out or getting frustrated when the one they happened to grab didn’t have what they were looking for?
However, we know that people are still flocking to the Yellow Pages in droves. According to the most recent LSA Local Media Tracking Study, the top print heading, restaurants, still receives over one billion references annually. Sixteen other headings draw over 100 million references each. That’s a lot of shoppers who are ready to buy and actively searching for their product of choice. For many categories, particularly those involving home maintenance and improvement (i.e., pest control, plumbers, electricians, HVAC, appliance repair), DAC Group’s Search Landscape Study, in cooperation with Kantar Media, showed that print Yellow Pages ranked either first or second as the media that consumers reference first when shopping for a product or service. [1]
DAC Group’s Search Landscape Study also found that 53% of shoppers use search engines first when searching for business information to make a purchase. In fact, four of the top five sources are all online-based. [1] But the one that isn’t—ranked second overall—is none other than print Yellow Pages. How can this “archaic” method still rank high? Simple—it works.
Over the years, survival of the fittest has taken root, and a once-bloated industry has come back down to size. Many small publishers have either sold off their business or closed up shop altogether. In addition, the recession has weeded out weaker businesses and eliminated advertising budgets for others. The good news for advertisers is that there’s less fragmentation and the directories that remain are more useful than ever. All the top competitors are in one place and shoppers can easily find what they’re looking for. There’s less of a need to spend little bits of money in small directories just to maintain a presence. Instead, that money can be pooled for higher-impact ads in the strongest books in the market and even extended to online offerings.
In the face of negative media reports about the industry’s health, as well as legislation restricting automatic home delivery, it may be tempting to drop print Yellow Pages in favor of other media. However, it only takes a look back to one of the worst economic times in history to see why that could be a catastrophic mistake. During the Great Depression, many advertisers pulled back on their advertising, including cereal maker C.W. Post. At the same time, competitor Kellogg’s doubled their advertising budget. When everyone else was absent from the advertising landscape, Kellogg’s was there and consumers took notice. Kellogg’s profits increased by nearly 30% in the midst of the depression and set the foundation for dominance in their industry for decades to come.
The best news of all for DAC Group’s clients is that no matter which directional media you choose to promote your business, we have the tools to make your advertising successful. We can craft an integrated media plan that fits your needs and ensures that you will be where consumers are shopping. Maybe print Yellow Pages aren’t the right fit for your category, but if they are, rest assured that rumors of their demise have been greatly exaggerated and we’ll be happy to prove it.
-Amy Rybczynski, Marketing Research Analyst
[1] DAC Group landscape study, conducted by Kantar with 5,000 North Americans in October 2011
http://blog.dacgroup.com/dont-write-that-obituary-just-yet-print-is-alive-and-well
The problem with Yellow Media Inc. is not so much their business but the confidence of their creditors. Ocassionally I read a blog called “Credit Writedowns” by Edward Harrison. Here’s what he has to say:
“When bankruptcy comes, it does so normally as a result of a liquidity crisis. This is true for countries as much as it is for companies. It’s not as if someone in charge walks in one day and says “you are insolvent so you must default immediately.” That is what happens in the case of banks seized by the regulator.
In other cases of insolvency, creditors become spooked about longer-term insolvency. At first, they demand a higher return for their loans. Eventually, they pull in their horns altogether. Liquidity dries up and the company or country is unable to roll over its debt requirements. It literally runs out of money.
This is exactly what happened to Northern Rock, Bear Stearns and Lehman Brothers in 2007 and 2008. They ran out of money because no one was willing to lend to them – quite different from the bank seizures we see the FDIC conducting every Friday.”
http://www.creditwritedowns.com/2010/05/liquidity-and-solvency.html
The conclusion I draw from the Edward Harrison article is that the best metric to follow when analyzing YLO’s chances for survival is its cash position and the trends thereof. This would have to be calculated/estimated monthly since corporate taxes are paid monthly and are not insignificant.