US CREDIT-Earnings miss spooks Idearc bondholders

By Anastasija Johnson

NEW YORK, July 31 (Reuters) - Idearc Inc's IAR.N bonds
slumped to record lows on Thursday and are likely to decline
further after an earnings miss by the company intensified
concerns about the long-term viability of the directory
publishing business.

The Dallas-based publisher of Verizon Yellow Pages
directories on Tuesday missed market forecasts with a 30
percent drop in quarterly profit, hurt by slowing Internet
revenue growth and a continued slump in print product revenue.
For details, click on [ID:nBNG185953].

Idearc, which was spun off from Verizon (VZ.N) in 2006,
reported a 5.7 percent decline in revenue to $759 million,
missing analysts' average estimate of $764.5 million.

Like the whole publishing industry, the company's revenues
have been hit by a slowing economy and growing competition from
the Internet as small businesses spend less on advertising and
consumers rely increasingly on web searches rather than
telephone directories. Advertisers are also switching to the
Internet.

As Idearc's own efforts to boost its Internet business came
short of expectations and multi-product advertising sales -- a
key indicator of future revenues -- fell 9.3 percent, bond
investors began fretting about the firm's long-term prospects,
analysts said.

"They are victims of the Internet and there is no clear end
in sight on how bad the numbers can get," said Gimme Credit
analyst Shelly Lombard.

"Investors are demanding a higher yield because the sense
is they are not in a cyclical decline, meaning earnings and
revenue may come back, but in a secular decline meaning they
may never come back," Lombard said.

Since the company reported results on Tuesday, its 8
percent notes due in 2016 lost 15.25 cents and hit a record low
of 43.5 cents on the dollar on Thursday to yield almost 24
percent, according to MarketAxess.

The cost to protect Idearc's debt against a default with
credit default swaps for five years surged to a record 40.5
percent upfront, or $4.05 million to protect $10 million for
five years, in addition to annual payments of $500,000,
according to Markit Intraday.

"They were supposed to be cash flow machines, unfortunately
now it's questionable cash flow relative to the amount of debt
they have," said Kingman Penniman, president of high-yield
research firm KDP Investment Advisors.

Idearc has about $9 billion in debt, including a credit
facility, two term loans and senior unsecured notes.

Moody's Investors Service downgraded Idearc's unsecured
debt to "B3," six levels below investment grade, in April and
has a negative outlook, meaning another downgrade is likely in
the next 12 to 18 months.

The current credit default swap level implies a "Caa2"
rating two notches lower, while the bonds are trading even
lower at "Ca," close to default, according to the credit
strategy group at Moody's.

CreditSights analyst Jake Newman said investors may have
overreacted to the results since the company is accumulating
cash after it cut its dividend.

"The results are not good news for investors. Still, we
think that the current credit valuation overstates the risk for
credit investors because of the free cash flow generation of
the business," Newman said in a report.

Yet, KDP Investment Advisors cut its ranking on Idearc on
Wednesday on expectations that the company's earnings will
continue to decline and leverage measures will increase. It
maintained its hold recommendation on Idearc's loans and
bonds.

"With respect to the bonds, while we believe they're
trading modestly below recovery values, we also expect that any
potential upside could be largely offset by incremental
negative catalysts either for the company in particular, or for
the publishing sector in general," according to its report.
(Editing by Leslie Adler)