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Yellow, with waiver, confident it will meet bank covenants

Yellow directories, with waiver from banks, confident it will meet covenants

By Jonathan Underhill

Jan. 8 (BusinessDesk) – Yellow, the directories business seized by its bankers in 2011, is confident it will continue to comply with its debt covenants after gaining waivers for 2014 and will be able to refinance some $414 million of debt due next year.

NZ Directories Holdings, which owns the Yellow business, narrowed its net loss of $12.5 million in the year ended June 30, 2013, from a loss of $78 million a year earlier when it took impairments totalling $112.9 million against goodwill, brands and customer relationships, according to its annual report. Impairments in the latest year were $41 million.

Sales fell to $180.6 million from $209.7 million in 2012.

Bankers to the company formerly known as Yellow Pages Group wrote off $1.05 billion of debt when they took control of the business in 2011. They were issued 250 million shares held via Yellow Pages Equity Trust and $500 million of senior notes, of which $86 million has since been repaid, in the restructuring in January 2011.

The equity of the original owners, Hong Kong-based Unitas Capital and Canada's Ontario Teachers' Pension Plan, who bought Yellow Pages from Telecom for $2.24 billion in 2007 in a leveraged buy-out, was wiped out.

The floating rate notes mature in August 2015 and NZ Directories began talks with its banker owners late last year over refinancing its facilities. Chief financial officer Michael Boerson, who saw the company through its restructuring, says he is confident the banks will agree to refinance the business.

“They own the business anyway,” he told BusinessDesk. “While we’re producing good cash there’s no logical reason why they would ask for the debt back. But we still need to make sure we have the right capital structure.”

The company’s gearing still looks horrendous. It had negative equity of $193 million last year, a deterioration from $180.9 million in 2012. Net debt was $382 million, more than twice the company’s capital of $188.7 million. The gearing ratio worsened to -202 percent from -175 percent.

Like state-owned postal service New Zealand Post, NZ Directories is chasing the migration of consumers and businesses to digital from physical delivery.

Some 70 percent of last year’s $9.4 million capital spending was on a proprietary technology platform to deliver digital products and services. Digital revenue was $46 million last year, or about 26 percent of total sales. That’s up from $41 million, or about 20 percent of total sales in 2012. The bulk of revenue comes from the phone books business.

“We would like to get to the point where digital value will outweigh print,” Boerson said.

NZ Directories is meeting its interest payments out of operating cash flow, its accounts show. Net cash flow from operating activities was $50.9 million after payment of $32.9 million of interest. It paid interest of $36.6 million in 2012 and had net cash flow from operations of $29 million.

In the latest year it also made repayments on its senior notes of $48.3 million, up from $34.8 million a year earlier.

The senior notes have a covenant to achieve a minimum target for earnings before interest, tax, depreciation and amortisation, tested at the end of each quarter. Notes to the company’s annual report show that in September last year lenders provided covenant waivers for the final three quarters of 2014. The interest rate on the notes was 7.21 percent as at June 30 last year.

Telecom was praised for achieving such a strong price when it sold the business in 2007 and Boerson said “in hindsight” the original buyers probably paid too much.

“Telecom got a very good price,” he said. “Whether it was overpaid or overvalued, it was a good deal at the time. Then the economy changed. The GFC hit.”


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