What’s that we can hear from the Reading headquarters of Yell? Why, it is the unmistakable sound of the penny finally dropping.
Here’s Tuesday’s “shock” statement from the heavily indebted directories company.
Yell Group plc (LSE: YELL) (“Yell” or “the Group”) today announces that it has embarked upon a process to comprehensively refinance the Group. This will lead to the Group holding discussions with its debt holders with a view to extending the maturity and changing the terms of its debt facilities and, in due course, to discussions with its principal shareholders.
These discussions and the resulting processes are expected to take through to the Autumn to complete.
The timing of this statement is interesting. Earlier this month, Yell announced that Bob Wigley, the former Merrill Lynch investment banker, would be its new chairman. Although Wigley does not take up his position for another month, his appointment seems to be having a galvanising effect on the board.
The question is will the debt holders play ball? And, assuming they they do, what will it cost Yell? The answer, rather obviously, is significantly higher interest charges and lower earnings, according to Citigroup.
The group plans to hold discussions with its debt holders with a view to extending the maturity and change the terms of its current debt facilities (due in 2012 with a blended cost of c.7%). The company expects, in due course, to have discussions with principal shareholders as well. The process is expected to take through to the Autumn to complete.
With c.£4.2bn of net debt, slightly under 5x net debt/EBITDA on a constant currency basis, the cost of debt could increase substantially. We should note that there is significant uncertainty over what cost of debt could eventually be achieved, but assuming that it doubles (to around 14%; and arguably consistent with the fact that Yell’s debt trades at c.50p in the £1) would make a material difference to current earnings. In 2010E we forecast EBITDA of £794m and net interest expense of £327m.
Little wonder then, that shares in Yell were off 4p at 26.75p, a fall of 14 per cent, on Tuesday morning. Until this process is complete equity investors will have no certainly over future earnings streams and will continue to fret that this whole process could result in some form of debt for equity swap. After all, can Yell ever trade its way out of £4.2bn, (or £3.8bn see below) of debt?
Update:
Yell would like to point out its debt number, on a constant currency basis, is in fact £3.8bn and therefore the EBITDA multiple is 4.7. They also note that other brokers, Goldman Sachs and house broker Merrill Lynch (which recently withdrew its rating on Yell) reckon the debt reset cost will be near to 10%. All we will say, is that it takes two (or more) to make a market.
Related link:
Working knowledge of reckless leverage, Yell edition – FT Alphaville