BUSINESS

Yellow Media threatens creditor protection if recapitalization rejected next week

08/28/2012 11:25 EDT | Updated 10/28/2012 05:12 EDT
MONTREAL - Yellow Media Inc. has threatened to reduce almost $2 billion of debt through creditor protection if a recapitalization plan designed to give it breathing room to realign its business is rejected at a special meeting next week.

"Delaying the inevitable will adversely affect our business as will a long, acrimonious and protracted restructuring," president and CEO Marc Tellier said Tuesday during a conference call.

"We have tabled clearly the best alternative available to us and if a recapitalization is not implemented we may be required to immediately pursue alternatives that are less favourable to the company and its stakeholders."

The Montreal-based directory publisher said it has amended the resolution approving the recapitalization to authorize the company to implement the plan through the Companies' Creditors Arrangement Act if the current effort "appears for any reason impracticable."

Tellier said the board of directors has unanimously determined that the recapitalization plan is in the best interests of Yellow Media after considering alternatives proposed by major stakeholders.

A group of lenders has filed a motion with the Superior Court of Quebec to challenge the company's proposed plan to swap debt for equity.

The group, representing holders of 6.25 per cent convertible unsecured subordinated debentures, represents numerous retail and institutional investors.

It wants Yellow Media Yellow (TSX:YLO) to withdraw the proposed plan of arrangement, which it says is unfair to the group, and has said it will vote against the proposal.

Without specifically referring to any group, Tellier said any recapitalization alternative "must be executable in the context of financial reality and the legal and financial constraints that exist."

Tellier insisted that the company's proposal offers junior stakeholders the best long-term value and is "unprecedented" compared with other recent recapitalizations.

"We believe that the treatment received by the junior stakeholders under the recapitalization is far better than what would have been the outcome for them in the spectrum of other options considered."

Under terms of the recapitalization proposal, holders of convertible debentures, preferred shares and common shares will receive 17.5 per cent of new shares in the company, along with warrants representing 10 per cent of new common shares.

Existing credit facility lenders and noteholders will share $750 million of senior secured notes, $100 million of subordinated unsecured debt, 82.5 per cent of new shares and $250 million of cash.

Overall, the plan would cut $1.1 billion of debt or $1.5 billion if preferred shares are included. No debt will mature before 2018 and Yellow would save $45 million a year in interest payments.

Teller said Yellow needs time and financial flexibility to transform itself into a digital media company amid a decline its print business.

"We cannot afford to be distracted or set off course by balance sheet challenges which are predictable and need to be addressed imminently," he said.

Yellow has too much debt, which is a source of substantial risk and may hinder the company's ability to access new cost-effective capital, he said during the brief call in which questions were not permitted.

More than 44 per cent of Yellow Media's debt is due in 18 months, producing refinancing risk for which there is "no silver bullet," he said.

"If this is not addressed now it would not only be detrimental to the value of the company but also would negatively impact our day-to-day business activities."

McMillan LLP, counsel for another group of lenders that includes major banks, has said it would be best for the company to withdraw its proposed restructuring plan under the Canada Business Corporations Act and instead enter further talks with stakeholders.

The Toronto-based law firm represents Canada's Big Six banks — the Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank, Bank of Nova Scotia, Royal Bank and Toronto-Dominion — plus the Caisse Centrale Desjardins. They said they were owed $369 million plus interest by Yellow Media as of last Sept. 28.

The company also said opinions issued by BMO Capital Markets and Canaccord Genuity say the plan is fair from a financial point of view.

As well, Glass Lewis & Co. and Institutional Shareholders Services Inc., two leading independent proxy advisory firms, have also recommended that common shareholders vote in favour of the proposed recapitalization, it said.