Moody's drops R.H. Donnelley to Caa1

Moody's Investors Service said it downgraded R.H. Donnelley Corp.'s corporate family rating to Caa1 from B2 and its probability-of-default rating to Caa2 from B2, prompted by concerns that the company may determine that a complete debt restructuring represents the best alternative of addressing its currently challenged capital structure.

The agency also lowered the company's speculative grade liquidity rating to SGL-3 from SGL-2, 6 7/8% senior notes due 2013 to Caa3 (LGD5, 70%) from Caa1 (LGD5, 87%).

The downgrade of the probability-of-default rating reflects concern that a pre-packaged bankruptcy, distressed exchange or other restructuring measures likely represent the optimal solution to realign the company's over-leveraged balance sheet, according to the agency.

Ratings reflect R.H. Donnelley's 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 of its markets and lack of equity support provided to debtholders, the agency said.

Ratings are supported by R.H. Donnelley's large scale, as well as the strong market positions conferred by its exclusive publishing agreements, the agency noted.

Ratings also reflect the company's diversified customer and geographic market base, and the still relatively healthy free-cash-flow generating ability of its properties, Moody's said.

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