Yell Group, the telephone directories business struggling under a £2.6bn debt pile, is hoping to spend £160m buying back its own bonds and is looking to renegotiate the terms of its loan for the second time in two years.
The Yellow Pages borrowed heavily to fund European expansion but has seen its print revenues decline steadily against tough competition from Google (NSDQ: GOOG). As chief executive Mike Pocock attempts to turn Yell into an online business, and revenues continue to decline, the company is in danger of breaching covenants unless lenders agree to increase headroom.
The company said in a statement to investors: “None of the alternative strategies available, for example running the existing business for cash or selling off part of the business, provide any real chance for Yell to be able to repay its debt.
“In each of these alternatives, given its dependence on print, the business remains in terminal decline with major adverse consequences for cash generation and for the ability to raise new capital.”
Yell said on Monday it would meet the 31 December covenant test, when debt must be no more than 5.99 times pre-tax profits. Earnings stood at £513.6m at full-year results in March, meaning its debt at the time of £2.77bn gave a debt to earnings ratio of 5.38:1.
The covenant has already tightened sharply from June, when it stood at over 7.50:1. By Christmas 2012 it is due to drop to 4.85:1, before ending at 3.66 in June 2014, when the loan is due to be repaid. Yell is asking for headroom of 6.25:1 this December, 6.00:1 in December 2012 and 4.50:1 by June 2014.
Lenders are being asked to approve the plan by 30 November. For the plan to be agreed, two thirds of lenders by value must vote in favour. As a carrot, Yell is promising that if leverage exceeds 4.60:1 by March 2013, lenders will receive a fee of 2% of their holding.
The company is also offering to increase the amount it spends buying back its own corporate bonds by over £50m to £159.5m, and to reduce its revolving credit facility to £30m from £173m.
Pocock was hired to run Yell at the beginning of January, joining chairman Bob Wigley, a well known city dealmaker and former head of European operations at Merrill Lynch. Wigley steered the company out of immediate trouble in 2009, helping to reduce debt from £4bn in 2009 with the help of a refinancing and a £660m cash call.
Long-standing chief executive John Condron left in 2010, after 30 years with the company. He led the company through its demerger from BT (NYSE: BT) in 2001, and a period of international expansion and private equity ownership under Apax Partners, after which Yell joined the stock exchange.
This article originally appeared in Guardian.co.uk.