Banks face NZ$900 mln loss on Yellow Pages debt

A consortium of banks led by BNZ have officially put Yellow Pages Group (YPG) up for sale and now face a loss of around NZ$900 million as the likely sale price of up to NZ$800 million is expected to fall well short of the directories group's debts of at least NZ$1.7 billion.

The senior debt holders include lead banker the BNZ, ANZ, Westpac, Deutsche Bank, Credit Agricole Corporate and Investment Bank (formerly Calyon), Barclays, Macquarie Group, Allied Irish Banks and the Royal Bank of Scotland. A sale is likely to see the shareholders, including Canada’s Ontario Teachers’ Pension Plan who originally paid NZ$2.24 billion for the directories group at the top of the market in early 2007, wiped out.

An information memorandum, containing detailed financial information, will be available to potential buyers of YPG this week with indicative bids sought by the end of the month. Meanwhile, a standstill agreement on interest payments on YPG's debt mountain - the company had interest payments of NZ$154.3 million in the June 2009 year - has been extended until the end of July.

YPG issued a brief statement on Friday afternoon, via public relations company Porter Novelli, saying that in conjunction with its banking syndicate it had started a review process to assess the future ownership options for the business. Goldman Sachs JBWere had been appointed to assist with the process.

While this in itself isn't new, with the potential sale of YPG reported by interest.co.nz in April and Goldman's appointment in May, interest.co.nz was told Friday's announcement effectively signifies an authorisation agreement with the banks, who were owed NZ$1.7 billion as of June 30, last year, meaning they definitely want to sell. That means other potential solutions to YPG's capital structure problems such as a debt restructure or equity injection from existing shareholders are off the table, at least for now.

The primary task for Goldman is likely to be to get back as much of the senior debt as possible given Yellow Pages is expected to be worth significantly less than the NZ$1.275 billion owed to senior debt holders, which includes capital expenditure facilities, in today’s market.

One estimate put to interest.co.nz was that Goldman might expect to attract interest in the NZ$600 million to NZ$800 million range. That could mean a sale for as little as four to six times annual earnings before interest, tax, depreciation and amortisation (ebitda) compared to the 14 times ebitda paid for YPG just three years ago. That leaves subordinated debt holders, who hold the balance of YPG's debt, about NZ$540 million at June 30 last year, facing complete loss as do its shareholders.

Some of the banks are understood to have already made provisions for a loss.

Bought from Telecom through a leveraged buyout by Hong Kong-based Unitas Capital, formerly CCMP Capital Asia, and Canada’s Ontario Teachers’ Pension Plan for NZ$2.24 billion in March 2007. Of that purchase price, NZ$1.5 billion was funded through borrowings from about 36 lenders. Some of the original lenders have since sold out, including the Accident Compensation Corporation.

As of June 30, 2009 YPG had debt equivalent to more than 10 times its annual ebitda on its balance sheet.

Under its existing owners YPG needed to keep lifting its earnings, which have been declining as have those of other major companies dependent on advertising revenue, to avoid breaching its banking convents. The business last year produced ebitda of NZ$162.7 million. For the latest financial year ebitda is said to have fallen to between NZ$130 million and NZ$140 million.

A prospectus for Yellow Pages’ ultimately canceled NZ$300 million 2007 retail bond offer noted: “A breach of the financial covenants is a senior event of default and the senior participants may, at any time while the breach occurs, cancel any advance or the senior facilities in full or demand payment of the outstanding principal and all other secured money owing to the senior finance parties.”

That means the senior debt holders are effectively in the driver's seat. Goldman, which advised Telecom on its 2007 blockbuster sale of the business, was rehired to once again seek a buyer.

International private equity funds, perhaps including distressed asset buyers such as Cerberus Capital Management and CVC Capital Partners, and other directories business owners are seen as potential bidders.

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