DBRS Confirms YPG Holdings Inc. at BBB (high), R-1 (low), Stable Trend

DBRS has today confirmed the long-term and short-term ratings of YPG Holdings Inc. (YPG or the Company) at BBB (high) and R-1 (low), respectively. DBRS has also confirmed the Company’s Exchangeable Subordinated Debentures at BBB and Cumulative Preferred Shares at Pfd-3 (high). The trend on all ratings is Stable.

The rating remains underpinned by the Company’s dominance as the incumbent directories publisher in Canada, a market which continues to maintain high usage rates in traditional print directories, and supports a meaningful and growing online directories and vertical media platform.

The rating is further supported by YPG’s industry leading EBITDA margins of roughly 55% and the Company’s strong liquidity position, as evidenced by good free cash flow generation (approximately $130 million for the latest twelve months ending September 30, 2008), over $600 million of undrawn availability under its $950 million committed bank facilities at the end of the third quarter of 2008, and capability and flexibility to refinance upcoming maturities (including $450 million in notes which mature in April 2009).

Through the remainder of 2008 and into 2009, the economic environment is expected to result in a deterioration of the advertising market, which is expected to challenge advertising dependent issuers. While YPG’s business model and diversification (geographically and by product line) should provide some insulation from soft market conditions, a protracted economic downturn could make strong top-line performance difficult. As a result, the Company’s focus on cost containment and operational efficiencies are expected to drive the majority of adjusted EBITDA growth through 2009.

Given existing business process initiatives already implemented (or expected to be completed before the end of 2008), and when considering new products and the initiatives undertaken to grow the Company’s digital revenues, DBRS believes that YPG’s 2009 adjusted EBITDA targets, with growth of between 4% and 7% in both directories and vertical media, are achievable.

From a free cash flow perspective, YPG is expected to maintain good growth in 2008 and through 2009 as a result of growth in cash flow from operations and lower capital expenditures, partially offset by a slightly higher aggregate cash distribution (although the full amount of the 3.7% per unit distribution increase at the end of 2007 was partially offset by unit repurchases during 2008).

YPG’s free cash flow is expected to continue to demonstrate solid growth through 2010 as a result of the Company’s limited capital requirements and a gradual reduction in the distribution payout ratio as YPG prepares to become fully taxable on January 1, 2011.

Through the end of 2008, DBRS expects YPG’s credit metrics to remain stable on a year-over-year basis, with DBRS-adjusted gross debt-to-EBITDA ranging between 2.90 times and 3.00 times. This is also expected to continue through 2009.

YPG is expected to continue to manage its balance sheet in a conservative manner, balancing strategic acquisitions and unit repurchases in line with its long-term unadjusted leverage targets, maintaining net debt-to-EBITDA between 2.80 times and 3.20 times (at September 30, 2008, this metric stood at roughly 2.90 times). These targets remain within the context of a strong investment grade rating when considering the Company’s favourable business risk profile and free cash flow capacity.

Note:
All figures are in Canadian dollars unless otherwise noted.