DBRS Confirms Yellow Pages Income Fund Stability Rating at STA-1 (low)

DBRS has today confirmed the stability rating of Yellow Pages Income Fund (Yellow Pages or the Fund) at STA-1 (low). The stability rating is underpinned by: (1) the Fund’s dominance as the incumbent print and online directory publisher in Canada; (2) its industry leading EBITDA margins of roughly 55% (consolidated); (3) higher cash flow conversion rates given low and predictable capital requirements; and (4) a conservative payout ratio of roughly 80%, affording the Fund increased financial flexibility.

Yellow Pages’ cash flow from operations remains solid at just under $800 million for the twelve months ended September 30, 2008. Cash flow continues to improve moderately on a consistent basis as a result of the Fund’s keen focus on efficiency and operational improvements. Lower capital expenditures during the same period have allowed cash available for distribution to improve to over $750 million.

Despite expectations of a slowing economy and a softer advertising market in Canada, the Fund’s focus on operational efficiency and business processes, combined with its diversification, is expected to allow for similar financial trends (increasing cash flow from operations and stable capital expenditures) to continue through 2009.

As a result, DBRS expects the Fund to demonstrate solid growth in distributable cash through the remainder of 2008 and in 2009. DBRS notes the Fund has targeted increasing distributable cash on a per unit basis between 8% and 10% for both 2008 and 2009. Unit repurchases under the Fund’s NCIB should also assist the Fund in achieving these per unit targets.

Over the next two years, while distributions may continue to increase moderately, DBRS expects the Fund’s payout ratio to decline to the 70% level by the end of 2010.

As the Fund’s payout ratio declines, free cash flow is expected to increase steadily, demonstrating solid growth through 2010 as a result of the Fund’s limited near-term capital requirements. DBRS expects Yellow Pages to continue to use free cash flow for small- to mid-sized tuck-in acquisitions and for unit repurchases under its normal course issuer bid, managing its capital structure in line with a strong investment grade rating.

Note:
All figures are in Canadian dollars unless otherwise noted.