R.H. Donnelley's $1.6 billion credit facility backing the acquisition of the Sprint Publishing Assets (SPA) is bolstered by the directory business' trademark as collateral for the bank debt. "What's valuable about the acquisition is the trademark," noted Moody's Investors Service senior credit officer Christina Padgett. Moody's has assigned the credit a Ba3 rating. The Sprint trademark will be contributed to a bankruptcy remote Special Purpose Vehicle and if a different carrier were to purchase any Sprint assets, the buyer would assume Sprint's obligations with respect to R.H. Donnelley. "You want to make sure that you have access to that trademark," said Padgett.
While the ratings take into account the concerns regarding SPA's operating history, Padgett notes that by focusing on the directory business, R.H. Donnelley has the opportunity to improve the SPA operations in a way that its former parent could not. "There's more upside in this deal [compared to the other two directory deals] because I don't think that SPA was managed well," said Padgett. Bad debt expense and high employee turnover hurt SPA's operating history, she noted. Going forward, Donnelley will continue to encounter issues affecting all directory businesses including modest growth opportunities, the volatility of paper prices, uncertainty within the telecom sector, a competitive industry and economic cyclicality.
Additionally, the credit is highly leveraged--total debt-to-adjusted EBITDA is close to six times. Moody's anticipates credit protection measures will improve as a result of significant free cash flow expected from the merged entity. This future cash flow is slated to go towards debt repayment. Furthermore, the bank debt has a considerable cushion of subordinated debt, including $300 million of senior notes and $450 million of senior subordinated notes rated B1 and B2, respectively. Calls to Steven Blondy, cfo, were referred to a spokesman who did not return calls.