Fitch Ratings has affirmed the 'B+' Issuer Default Ratings (IDRs) on R.H. Donnelley Corp (NYSE:RHD), R.H. Donnelley, Inc. (RHDI), Dex Media, Inc. (DXI), Dex Media East (DXE) and Dex Media West (DXW).
Fitch has also taken the following rating actions:
R.H. Donnelley Corp. (RHD Holding Company)
--IDR affirmed at 'B+';
--Senior unsecured upgraded to 'B/RR5' from 'B-/RR6'.
R.H. Donnelley Inc. (Operating Company; subsidiary of RHD)
--IDR affirmed at 'B+';
--Bank facility affirmed at 'BB+/RR1';
--Senior unsecured upgraded to 'BB+/RR1' from 'B+/RR4';
Dex Media, Inc. (Dex Holding Company; subsidiary of RHD)
--IDR affirmed at 'B+';
--Senior unsecured upgraded to 'B/RR5' from 'CCC+/RR6'.
Dex Media East, Inc. (Operating Company; subsidiary of Dex)
--IDR affirmed at 'B+';
--Bank facility affirmed 'BB+/RR1';
--Senior unsecured withdrawn from 'BB/RR1';
--Senior subordinated withdrawn from 'B-/RR6'.
Dex Media West, Inc. (Operating Company; subsidiary of Dex)
--IDR affirmed at 'B+';
--Bank facility affirmed at 'BB+/RR1';
--Senior unsecured upgraded to 'BB+/RR1 from 'B/RR5';
--Senior subordinated upgraded to 'B/RR5' from 'B-/RR6'.
The Rating Outlook remains Stable.
Three key developments over the past several months have contributed to the rating actions described above (and contributed to two prior rating actions on Sept. 20 and Oct. 3, 2007.) First, the company issued $1.5 billion in unsecured notes at the RHD holding company level and downstreamed a total of roughly $830 million to RHDI: $640 to refinance the senior unsecured notes and approximately $190 to paydown secured debt. Second, the company refinanced its DXE senior secured credit facility. As part of this transaction the company downstreamed $300 million from RHD holding company (also through proceeds from the $1.5 billion issuance) and tendered for DXE unsecured notes. The remaining $370 million of the $1.5 billion issuance was predominantly used to repay $328 million in borrowings associated with the acquisition of www.business.com, as well as to pay for fees and expenses related to the refinancings. Lastly, in addition to capital structure actions, repayment of debt from operating cashflow has improved the recoverability of securities at the various debt issuing entities (DXW in particular).
Consistent with Fitch's recovery methodology, the individual security ratings reflect the determination and application of prospective recovery in a stressed scenario and are notched accordingly. R.H Donnelley's recovery ratings reflect Fitch's expectation that the enterprise value of the company, and hence, recovery rates for its creditors, will be maximized in a restructuring scenario (going concern), rather than a liquidation. Fitch reviewed the recovery prospects of each of the three operating companies separately. Specifically, the 'RR1' recovery rating for the each of the senior secured facilities, as well as RHDI and DXW senior unsecured notes reflects our belief that 91%-100% recovery is reasonable. The recovery rating of 'RR5' for RHD and DXI senior unsecured and DXW senior subordinated notes reflects that 10%-30% recovery is reasonable due to their position in the capital structure.
Going forward, Fitch expects the company to continue to pay down debt under the secured facilities. Also, the company has several relatively high priced debt tranches (at DXW) that could be called around mid-2008. Fitch will continue to address the changes in expected recovery as these events unfold. We expect management will continue to balance debt repayment with returns of capital to shareholders (including the recently instituted dividend) and that leverage levels will remain above management's stated target of 5.5 times (x) for the next three to five years. There is capacity for some sustained top line revenue softness and modest additional shareholder friendly actions incorporated into the IDR.
The secured lenders to R.H. Donnelley Inc (RHDI), Dex Media West (DXW) and Dex Media East (DXE) have a strong covenant package. The facilities contain financial covenants, change of control provisions, additional debt restrictions, limitation on asset sales, restricted payments tests, limitation on liens, cross default, and mandatory pre-payments among other protections. The bonds are covered under various indentures, each with slightly different provisions from one another. Key provisions generally include protections in the form of financial covenants, change of control language, restrictions on secured debt, cross acceleration language and restricted payment tests. The consolidated leverage covenant maximum is 7.25x.
For further information, see Fitch's report dated March 8, 2007 which provides a detailed comparison and analysis of the key credit facilities and indentures and is available on the Fitch Ratings web site at www.fitchratings.com.
Fitch's Recovery Ratings (RR) are a relative indicator of creditor recovery prospects on a given obligation within an issuers' capital structure in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors can be found at www.fitchratings.com/recovery.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.