OREANDA-NEWS. S&P Global Ratings today assigned its 'B-' long-term corporate credit rating to directory publisher & digital services provider Hibu Midco Ltd. (Hibu Group), a subsidiary of Hibu Group 2013 Ltd. The outlook is stable.

At the same time, we raised our long-term corporate credit rating on Hibu Group Ltd. to 'B-' from 'CCC+' and then withdrew it. The outlook was stable at the time of withdrawal.

We also assigned our 'B-' issue rating to the new multicurrency ?300 million senior secured term notes due 2021. The recovery rating on these notes is '4', reflecting our expectation of recovery prospects in the lower half of the 30-50% range.

In addition, we assigned our 'CCC' issue rating to the multicurrency subordinated payment-in-kind (PIK) term notes due 2065. The recovery rating on these notes is '6', reflecting our expectation of negligible (0%-10%) recovery in the event of a payment default. Both instruments are issued by OWL Finance Plc and guarantee by Hibu Group.

Following the transaction, we are also withdrawing our issue and recovery ratings on the existing ?500 million (now amortized down to ?150 million) senior secured term notes and ?920 million subordinated PIK term notes.

The rating on Hibu Group primarily reflects our view we no longer see the group's capital structure as unsustainable. The current shareholders have converted a large portion of the PIK loan into common equity, which we estimate will reduce the group's S&P Global Ratings' adjusted debt to EBITDA (leverage) to 3.0x-3.5x expected in fiscal year ending March 31, 2017, from 6.5x the previous year. We do not see the capital restructuring as tantamount to a default given that the shareholders own the common equity, PIK loan, and the cash pay debt. The new capital structure comprises a new multicurrency PIK loan equivalent to ?250 million, and a new cash pay debt equivalent to ?300 million.

We assess, Hibu Group's financial risk profile as highly leveraged, despite the relatively low level of adjusted leverage of between 3.0x and 3.5x that we estimate over the next two years, along with solid free operating cash flow (FOCF) generation. Our assessment is tempered by our view of the directory publishing industry as highly volatile, reflecting the risk that Hibu Group's capital structure could quickly become unsustainable if negative business trends accelerate, leading to quick deterioration in earnings, cash flow, and credit metrics.

Our assessment of Hibu Group's business risk profile as vulnerable reflects the significant risk of a continued structural decline in the print and digital directories sector, as well as increased competition within the online marketing industry where the group is now focusing and expanding. However, we recognize the group's fair geographic diversification, with 56% of the EBITDA coming from the U. S. and 37% from the U. K.

The company is a publisher of print classified directories in the U. K. (Yellow Pages), in the U. S. (Yellow Book), and in Spain (Paginas Amarillas), with an online presence as well. Printing and digital directories activities create more than 65% of revenues, which is, in our view, a declining business model. Indeed, people finding, and gathering and sorting information has radically evolved in the past few years, with the emergence of many online players. The remaining 35% of the group's sales come from its digital solution offering to small and midsize enterprises, which we view as positive but still subject to high online competition. The ongoing cost-saving program allowed the company to increase its profitability in the last two years, and we think management will be able to maintain a stable EBITDA margin in the short to medium term. However, in the long term, we believe margins will remain under pressure due to Hibu Group's transition to the highly fragmented, intensely competitive, and rapidly evolving online market. We believe that in its online business, Hibu Group will have significantly less pricing power compared with its former leading or incumbent positions in the traditional classified directories business.

The stable outlook on Hibu Group reflects our expectation that the company will maintain adequate liquidity over the next 12 months thanks to positive and stable FOCF, an absence of short-term maturities, and adequate covenant headroom.

We could lower the rating if we see a prolonged deterioration in the group's EBITDA beyond our expectation, resulting in downward pressure on FOCF and leading to an unsustainable capital structure. We would also view liquidity deterioration and increasing risk of debt restructuring that we would view as tantamount to default as drivers for a downgrade.

We consider an upgrade as remote, and believe that any positive rating action will hinge on strengthening of the group's business risk profile and sustainable improvement in earnings and credit metrics.