Moody's cuts R.H. Donnelley

Moody's Investors Service said it downgraded R.H. Donnelley Corp.'s corporate family and probability-of-default ratings to B2 from B1, and its 6 7/8 notes to Caa1 (LGD5, 87%) from B3 (LGD5, 87%).

The downgrade reflects expectation that the yellow pages publishing sector will likely face a more severe and potentially protracted downturn than anticipated, which in turn could increase the probability of covenant pressure and tightened liquidity, according to the agency.

The actions follow R.H. Donnelley's recent disclosure that for the quarter ended Sept. 30, its advertising sales continued to decline in the 8% range while its free cash flow declined by 30% over the prior year period.

According to Moody's, the B2 corporate family rating incorporates persistently high leverage, its vulnerability to weakened market conditions facing the directory publishing business, the increasing threat posed by competing directory publishers and web-based directory service providers in virtually all its markets, a recent erosion of equity support provided to debtholders and dependence of the holding companies upon the receipt of continued covenant-compliant restricted payments from the three major operating companies in order to service the holdco debt obligations.

The rating is supported by R.H. Donnelley's scale and the strong market position conferred by its exclusive publishing agreements, the agency said.

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