Yellow Media tries to reassure nervous investors

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Yellow Media Inc. insists its transformation from a debt-laden directory publisher to a lean-ledgered online-marketing machine is on track. Increasingly nervous investors aren't so sure.

With the company's stock and bond prices falling amid a swirl of rumour, conjecture and confusion, Yellow Media issued a statement Tuesday at the request of regulatory authorities, stressing that the $745-million sale of its Trader Corp. unit is proceeding as planned and reaffirming its dividend policy on common shares.

Despite the reassurances, Yellow Media's share and bond prices slipped further - extending not only Monday's selloff, which sliced 6 per cent off its share price, but also the deep and lengthy slide of a company that was once a staple of many Canadian retail investors' portfolios.

Yellow Media's stock has fallen 40 per cent in the past six months, including 20 per cent in the past two weeks alone. Its 10-year bond is yielding 8.29 per cent, more than five percentage points higher than benchmark 10-year Canadian government bonds.

The company's statement was aimed at cooling growing fears on the Street that the Trader deal - announced in March and expected to close in June - could unravel. The sale would provide proceeds to significantly dent Yellow Media's $2.1-billion debt load; without it, credit rating agencies could see fit to cut Yellow Media's debt ratings to junk levels - which, some analysts believe, would trigger stricter loan covenants that would likely force the company to reduce its common-share dividend.

'Grave Concern'

"There's grave concern of a downgrade," said Julian Pope, head of credit trading at Desjardins Securities, while expressing puzzlement at what triggered the fears. "I don't know what to make of it. But it's got the market spooked."

Both the company and some analysts pointed at short sellers, who have been aggressively betting against the company in recent weeks, for spreading the negative talk.

"The shorts have been having a field day," said one analyst, adding: "The company has given them plenty of ammunition."

The short sellers had backed off earlier this month, when Yellow Media started a share buyback program that provided support to the stock.

But a few days after the buyback program began, public disclosures revealed that the company's chief financial officer, Christian Paupe, had sold a large chunk of his personal shareholdings into the buyback - just one day before the company's chief marketing officer, Stéphane Marceau, abruptly resigned.

While the company said Mr. Paupe's sale of 200,000 shares was for the purposes of repaying a loan to a third-party financial institution, analysts noted that the timing and optics weren't good.

Bondholders suggested that Monday's sharp price declines were exacerbated by the Memorial Day holiday in the U.S. market, which could have restrained liquidity for Yellow Media's securities and tightened the squeeze on those eager to sell.

What Changed?

The origin of the persistent rumour about a possible debt downgrade is a mystery - most of all to the two credit-rating agencies that rate Yellow Media's corporate debt, Standard & Poor's Corp. and DBRS Ltd. Both firms maintain investment-grade ratings on the debt - albeit toward the low end of what they consider investment grade - and both have stable outlooks on the ratings.

"From our perspective, nothing has changed," said Chris Diceman, senior vice-president at DBRS. He said his firm sees no big drop in Yellow Media's earnings before interest, taxes, depreciation and amortization (EBITDA) - which would normally be necessary to trigger the rating downgrades and breaches in debt covenants that the market seems to be anticipating.

"With stable EBITDA and debt actually coming down, that's not a company that in our view is headed in the wrong direction," he said.

"They have a lot of headroom under their covenants," said S&P credit analyst Madhav Hari. "We still think the business profile is investment grade … Fundamentally, we haven't seen any catalyst to make us think we need to revisit our view."

But the markets don't share the rating agencies' confidence.

"We believe [recent Yellow Media bond pricing]reflects balance sheet concerns from fixed-income investors, despite the fact that the official debt rating remains investment grade," analyst Scott Cuthbertson of TD Newcrest said in a note to clients Tuesday.

The common-share dividend yield now tops 17 per cent - a bloated level that signals strongly that the equity market believes the dividend is not sustainable.

"It's not trading like it's investment grade any more," said Matt Shandro, portfolio manager at Fulcra Asset Management and adviser to the Pender Corporate Bond Fund in Vancouver.