YP Holdings LLC 'B' Rating Affirmed On $200M Incremental Term Loan; Outlook Stable
- Tucker, Georgia-based marketing solutions provider YP Holdings LLC (formerly AT&T Interactive and AT&T Advertising Solutions) plans to incur $200 million of incremental debt under its senior secured term loan due 2018 to fund a special dividend payment.
- We are affirming YP Holdings LLC's 'B' corporate credit rating. We are also affirming our 'B' issue-level rating on YP's term loan. Our '4' recovery rating on the term loan remains unchanged.
- The stable outlook takes into consideration ongoing high-teens annual percentage rate declines in yellow pages publishing revenues and intense competition in online and mobile advertising. It also reflects our expectation that YP has the capacity and intent to repay about half of its pro forma outstanding debt within two years.
NEW YORK (Standard & Poor's) Feb. 4, 2014--Standard & Poor's Ratings Services today affirmed its 'B' corporate credit rating on U.S. marketing solutions provider YP Holdings LLC (YP) following the company's plan for a $200 million incremental senior secured term loan. The outlook is stable. At the same time, we affirmed our issue-level rating of 'B', with a recovery rating of '4' on this debt. The '4' recovery rating indicates our expectation for average (30%-50%) recovery for lenders in the event of a payment default. Our rating on YP reflects our assessment of the company's business risk profile as "vulnerable," based on the sector's steady structural decline, and our view of the financial profile as "aggressive," based on the rapid decline in revenue and EBITDA. YP has a large presence in the U.S. print and online advertising marketplace through its yellow pages print directories and online and mobile local-search and marketing solutions. YP's U.S. yellow pages print directories segment held about a third of the market share in the category, and its YP digital businesses generated almost $1 billion in revenues in 2013 (about 40% of revenue). The "vulnerable" business profile assessment is a primary driver of our 'B' corporate credit rating. In recent years, revenues have declined at a low- to high-teens annual percentage rate, and we expect revenue to continue its downward trend with the shift of advertising spending to digital and mobile advertising. Accordingly, absent a meaningful improvement in business prospects, which we do not expect, we believe that the company's business profile will deteriorate at an increasing rate. We also expect steady EBITDA margin erosion from the high-20% area to the high-teens percentage range over the next few years as the company strives to reduce costs in line with revenue declines, and as ad dollars shift away from higher-margin print advertising to lower-margin bundled digital offerings. Even under our base scenario of a moderate economic expansion, declines in print advertising sales will likely persist at a high-teens to low-20% percentage rate. We are skeptical that YP can accelerate growth rates in its digital segment. We view the online local search and advertising marketplace as intensely competitive and increasingly influenced by large industry participants, such as Google Inc. and Facebook Inc., which have significant technological expertise and financial resources. Furthermore, digital advertising is subject to sudden and rapid change caused by consumer acceptance of new business models and technologies. In 2013, YP's digital sales growth was meager at 2.7% (or 5.7% reflecting discontinued operations), compared with the robust mid-teens growth rates in online ad spending, and we remain concerned that a declining YP local sales force will eventually pressure digital revenue growth. In our view, despite the company's modest 1.67x pro forma adjusted leverage and good cash flow generation, the company's financial risk profile is "aggressive." Our assessment reflects the low probability, in our view, that the company will return to stable EBITDA and cash flow generation over the intermediate term. Furthermore, despite good near-term revenue visibility, our assessment reflects the risk that the capital structure may quickly become unsustainable if negative business trends accelerate and the company does not use a majority of its annual cash flow to repay debt. We view YP management and governance as "fair." RELATED CRITERIA
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| Primary Credit Analyst: | Minesh Patel, New York (1) 212-438-6410; minesh.patel@standardandpoors.com |
| Secondary Credit Analyst: | Christopher D Thompson, New York (1) 212-438-8847; christopher.thompson@standardandpoors.com |
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