(The following statement was released by the rating agency)
Feb 20 - Fitch Ratings has downgraded PagesJaunes Groupe S.A.’s (PagesJaunes) Long-term Issuer Default Rating (IDR) to ‘B-’ from ‘B’. Fitch Ratings has also downgraded PagesJaunes Finance & Co S.C.A’s senior secured notes rating to ‘B+’ from ‘BB-'. The Outlook is Negative.
The downgrade follows PagesJaunes’ (which has changed its name to Solocal) announcement that 2013 will see further gross operating margin (GOM; PagesJaunes’ EBITDA proxy, EBITDA before staff profit sharing) attrition with no stabilisation in cash flow generation in the short term. Fitch believes it may take at least a few years to show signs of stabilisation, during which the company must refinance its large 2015 maturities.
-Continued Cash Flow Declines:
Fitch previously guided that unless PagesJaunes demonstrated that it could stabilise cash flows, a negative rating would be considered. The company’s guidance for 2013 is for GOM to fall to between EUR445m-EUR425m, from EUR464m in 2012 and EUR488m in 2011. Fitch is concerned that the company’s cash flow will continue to decline beyond 2013. Therefore, PagesJaunes could approach the period when it must refinance its large 2015 maturities without demonstrating that it has successfully stabilised its core business.
Although the company has refinanced twice in the past two years, Fitch is concerned that a lack of stabilisation could hamper PagesJaunes’ ability to refinance its 2015 maturities. A Stable Outlook does not reflect this risk. If the company makes progress in refinancing these maturities, or if the company makes progress in stabilising its business, which would support a successful refinancing, then Fitch envisages revising the Outlook to Stable.
-Slowing Internet Revenue Growth:
PagesJaunes’ internet revenue growth slowed substantially in H212, with more aggressive competition from traditional media as well as other digital media impacting the company’s growth. While cyclical factors are likely to be affecting the company’s online revenue growth, Fitch is concerned that part of this decline may be structural i.e. a more aggressive environment in the French advertising market.
-Continued Digital Transition:
Although Fitch recognises management’s ability to manage the reduction in print revenues and the growth in internet revenues in a more successful way than peers across Europe, the transition to a digital business is still in progress. During the company’s February 2013 investor day, the company alluded to additional re-organisation efforts in 2014. Fitch believes that this might require the hiring of additional specialised sales staff and other additional costs. While Fitch understands the rationale for such an investment, the benefits of this might take a number of years to materialise.
Fitch has revised downwards its assumptions that derive the recovery ratings. In the case of a hypothetical distressed scenario, Fitch assumes a post-restructuring EBITDA of approximately EUR315m. Fitch continues to use a multiple of 5.5x. Although the lower post-restructuring EBITDA does result in slightly lower recoveries, the recovery rating of RR2 assigned to the senior secured debt does not change.
-Strong Brand Name:
Fitch recognises the strength of the PagesJaunes brand name and the company’s presence in the online segment. This could allow PagesJaunes to stabilise cash flows at some point. However, Fitch does not have visibility of when this could occur.
-Positive Cash Flow Generation:
Fitch believes that despite the challenges that PagesJaunes faces in its continued transition towards a digital media company, the issuer is still expected to generate positive cash flows and meet its debt service requirements until the significant bullet debt repayments that are due in 2015.
Positive: Future developments that could lead to positive rating actions include:
-If the company makes progress in refinancing its 2015 maturities, then Fitch envisages revising the Outlook to Stable
-Stabilisation in PagesJaunes’ GOM and cash flow generation
-Sustained internet revenue growth and no significant erosion in EBITDA margin
Negative: Future developments that could lead to negative rating action include:
-Dramatic reduction in online revenues, as well as an erosion in profitability of the online segment
-FFO net leverage more than 6x
-Negative net free cash flow generation
The refinancing transaction at the end of 2012 pushed most of PagesJaunes’ large 2013 maturities to 2015, resulting in a more favourable maturity profile for the group. However, the company now has a significant maturity of EUR1.2bn in 2015. The company generated a pre-dividend free cash flow margin of 17% in 2012, which is strong for the current rating and, aided by the presence of the 3x dividend restrictions and the cash sweep of 75% of excess cash flow, should help the company to deleverage as it approaches this wall of debt.