Buried in Wednesday’s annual results statement from debt laden directories group Yell was this rather worrying note:
The financial information contained herein has been prepared on a going concern basis. The Group is currently in full compliance with the financial covenants contained in all of its borrowing agreements. However, as a consequence of the increasingly uncertain trading conditions there is a risk that the Group would need to reset its financial covenants with its lenders.
If the Group were required but not able to agree amendments to the covenants such that undertakings to the Group’s lenders were breached, then the syndicate of lenders would have the right to demand immediate repayment of all amounts due to them, but only after a two-thirds majority vote for such action. Whilst this eventuality would, if it arose, cast doubt on the future capital funding of the Group, the Group’s cashflow forecasts show that in the year ahead interest payments will be fully met, with further cash generated to repay debt. For this reason the directors believe that adopting the going concern basis in preparing the consolidated financial statements is appropriate.
Now, most analysts expect Yell to scrape by this year but the very fact that its directors have felt the need to cover themselves in this way is somewhat concerning.
And it makes the recent price action in Yell even more difficult to explain.
As Numis Securities has noted this morning.Guidance for Q1 2010 is below our current estimates putting downward pressure on 2010 estimate. The group’s gearing remains too high and although current headroom is 15%, we expect this to deteriorate as we move through the year. With a combination of limited covenant headroom, downward pressure on our forecasts and no sign of stabilisation, we still see significant risk for equity investors in Yell and retain our negative recommendation.And on those covenants.
Net debt at the year end was -£4,207m, in line with NSe -£4,243m. The group reports that it currently has 15% headroom on its tightest covenant although we expect this to tighten as we move through the year. The group’s March 2010 covenant is for net debt/EBITDA of 5.17x, we currently forecast 5.27x. The group’s bank debt needs to be refinanced by April 2011.
But no one seems to be listening; shares in Yell currently off just 0.75p at 45.25p.
Update:
Just found this, buried even deeper in the statement.
The auditors have yet to report on the Group’s statutory accounts for the year ended 31 March 2009, however it is likely that the report, once issued, will include an emphasis of matter in respect of going concern along with an unqualified audit opinion.
Related link:
FTSE reshuffle time … – FT Alphaville
Impairments push Yell to £1bn loss – FT