Yellow Pages feels heat as debts mount

Yellow Pages publisher YPG is at the mercy of its bankers, sources say, as huge debts threaten to engulf its earnings.

The debts date from its acquisition by a private equity group in 2007, when Telecom offloaded the business for about $2.15 billion.

Since then earnings have fallen, debts have risen, and the consortium of banks holding YPG's $1.19b of senior debt are said to be alarmed that the business could be worth less than they are owed.

"This is so far from being fixed in an equity recapitalisation the banks have to take control," said a market source. "Yell in the UK has just restructured and trades at seven times earnings. At that multiple this business is worth $750-$800 million. The senior debt holders are owed $1.2b. Put any money into this business at all, it goes straight down the gurgler."

Another source said private equity buyers had based their purchase on the expectation earnings would rise above $170m.

"Instead it sounds like they're at $130m and heading south."

From a valuation in 2007 of about 13 times earnings, the market was now looking at seven times for a listed company and five times for a private sale. The outcome was a "catastrophic" loss of value, he said.

"It's clear the value's been so buggered they can't really recapitalise the business."

A potential outcome involves the banks taking control of the business by appointing a receiver, who would try to recover money through a sale of YPG.

Losers in that scenario could be the private equity investors led by CCMP Capital Asia (now known as Unitas Capital) who include a pension fund for teachers in Ontario, and holders of about $307m of subordinated debt.

YPG's most recent accounts are for the year to June 2009 and they show earnings (before interest, tax, depreciation and amortisation) of $162.7m, down 3% on the previous year. Although the operating business is highly profitable, the income only just covered interest payments of $157m, but only after $14.5m of interest on a bridging loan was simply waived and the debt of $42.6m converted to equity.

Sources close to YPG say the situation is "not terminal" and the company is working through options for a sustainable capital structure.

"It's a very public business. It would be the end of it if you put it into receivership. There's no benefit [to debt holders] in doing that."

YPG chief executive Bruce Cotterill said although print revenues had eased 5.4% in the six months to December, the operation was in good shape. Nevertheless, "irrespective of our trading performance, the business is not worth today what is was worth then [in 2007]. So it's appropriate to review the capital structure".

He said the firm had appointed Bain Capital and UBS to advise on options.

"The banks are very supportive," he said, "so I'm staggered to hear there's a rumour around about receivership."

Contrary to market talk, no debt covenants had yet been breached, he said, although "the reality is we will breach covenants eventually".

"We haven't even started talking to the banks about options, but I certainly don't think there are no options around new equity being injected."

YPG's purchase from Telecom attracted comment at the time for its high price and it has since emerged as a peak in the private equity boom. Theresa Gattung, then Telecom CEO, described the sale in her new book Bird on a Wire as "quite fortuitous".

"A year later a prominent New York merchant banker told me that this deal was regarded as the high-water mark of private equity deals done anywhere in the world in telecommunications," she wrote.

Shortly after the acquisition YPG tried to refinance some of its debt with a bond issue to the public, but had to withdraw the offer because of lack of support. The company's chairman at the time, James Smith, whose extensive experience with directory businesses in the US was a key part of the bond offer, left the board a year ago.

His replacement, Unitas Capital partner Eugene Suh, is specialist in distressed debt and a former restructuring and turnaround adviser at Ferrier Hodgson.

The failed bond offer left about $300m of subordinated debt in the hands of corporate financiers – a silver lining in the cloud, said one commentator. "The big positive is they got stuck with it and not the retail market."

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