Fitch Downgrades R.H. Donnelley Corp. to 'CC' on High Refinancing Risk

RHD (Holding Company (HoldCo))

--Issuer Default Rating (IDR) to 'CC' from 'B';

--Senior unsecured notes to 'C/RR6' from 'CCC+/RR6'.

R.H. Donnelley, Inc. (RHDI; Operating Company; Subsidiary of RHD)

--IDR to 'CCC' from 'B';

--Bank facility to 'B-/RR3' from 'BB/RR1';

--Senior unsecured notes to 'C/RR6' from 'B-/RR5'.

Dex Media, Inc. (DXI; HoldCo; Subsidiary of RHD)

-- IDR to 'CC' from 'B';

-- Senior unsecured notes to 'C/RR6' from 'CCC+/RR6'.

Dex Media East (DXE; Operating Company; Subsidiary of DXI)

-- IDR to 'CCC' from 'B';

-- Bank facility to 'B-/RR3' from 'BB-/RR2'.

Dex Media West (DXW; Operating Company; Subsidiary of DXI)

--IDR to 'CCC' from 'B';

--Bank facility to 'B+/RR1' from 'BB/RR1';

--Senior unsecured to 'B'/RR2' from 'BB/RR1';

--Senior subordinated to 'C/RR6' from 'B-/RR5'.

IDRs of 'CCC' reflect that default is a real possibility, while IDRs of 'CC' reflect that default of some sort appears probable. There are no Rating Outlooks assigned to the entities. These rating actions affect approximately $9.7 billion in total debt as of Sept. 30, 2008.

Fitch expects operating trends to continue to weaken materially in 2009 and 2010. However, today's rating actions are more a reflection of Fitch's view that the company possesses an untenable capital structure. The company has reduced debt somewhat at RHD via open-market purchases and a debt exchange, and bought back a modest amount of bank debt below par (RHDI obtained a waiver from its bank group to permit it to repay term loan debt at a discount to the principal amount). While Fitch still believes that management will remain focused on paying down debt and there is ample room around most of its covenants, RHD has significant maturities coming due in 2010 which it cannot address organically. Fitch is cautious regarding RHD's prospects to refinance such debt due to its weakening operating profile, high leverage and uncertainty related to market appetite. Fitch believes it is likely the company may pursue a more drastic restructuring of its debt obligations and that such an action or series of actions could constitute a default of some sort on some or all of its obligations.

The ratings incorporate the understanding that DXI is structurally subordinated to DXW and DXE, that RHD is structurally subordinated to DXI and RHDI, and that RHD has provided a guarantee (to which Fitch assigns little value) to RHDI. Fitch understands that the HoldCo's are dependent on dividends from the OpCos to support their sizable HoldCo debt loads ($4.5 billion in aggregate). Further, Fitch recognizes that free cashflow from any one OpCo would be insufficient to service interest obligations at both HoldCo levels and that the deficiency is even greater when including principal repayments at the HoldCo level.

Although there do not appear to be cross defaults among the entities and there are still a variety of circumstances under which Fitch's historical treatment of linking the IDRs may be plausible, the rating actions and approach to the ratings going forward are based on a belief that certain entities are more exposed to default than others. This treatment is supported by the view that refinancing risk is the most likely driver of default probability. In arriving at the conclusion to deemphasize linkage of the IDRs, Fitch assumed that substantive consolidation could be challenging for the HoldCo stakeholders to successfully claim. However, in distinguishing between the OpCo and HoldCo default probability, Fitch recognizes there is still a meaningful possibility that all entities could default simultaneously (pre-packaged bankruptcy, etc.).

Dex Media West (DXW)

The 'CCC' IDR for DXW reflects the $395 million senior unsecured debt that comes due in August 2010. While OpCo secured leverage through the bank debt (roughly 2 times [x]) and through senior unsecured notes (about 2.5x) is relatively modest and could enhance refinancing potential, Fitch is cautious regarding market appetite to supply fresh debt capital to any entities in the capital structure. Fitch believes it could be challenging (but possible) to repay the 2010 unsecured bonds from free cashflow at maturity if it ceased distributing dividends to DXI and chose to dedicate all free cashflow toward building up cash. Given the company's dependence on bank debt going forward, it is uncertain whether the company would dedicate such a significant amount of cash toward an unsecured obligation. Hence, Fitch believes the company may make a coercive offer below par to extend the notes beyond the bank maturity date in 2014. It is not clear how such an offer would be received by noteholders given Fitch's estimation that these notes could receive a material recovery in a bankruptcy. Regardless, there is a possibility that the outcome of any negotiation with the noteholders could be considered a default under Fitch's distressed debt exchange (DDE) criteria.

The debt instrument ratings for DXW (and the other entities) incorporate that Fitch has lowered the distressed EBITDA multiple used in its Recovery Rating (RR) analysis from 5.0x to 3.5x. The lower multiple reflects the limited tangible asset value, continued operating performance pressures and estimated contraction in market multiples. Given the higher likelihood of default, Fitch more heavily weights a conservative estimate of current market multiples given that historical multiples will likely be less achievable. Assuming this 3.5x multiple on an EBITDA discount of 15%, Fitch estimates the bank debt would receive 90%-100% recovery. Under these assumptions a 71%-90% recovery appears reasonable for the 'B' rated senior unsecured notes, while the subordinated notes are rated 'C/RR6' reflecting a 0% recovery expectation.

R.H. Donnelley Inc. (RHDI)

RHDI's 'CCC' IDR reflects Fitch's belief that RHDI will be unable to meet its heavy amortization burden in 2010 from free cashflow, making a negotiation with the banks likely. Fitch notes there is also heavy principal amortization in 2011. Even if RHDI ceased distributing cash to RHD (recognizing the facility expires in 2011), Fitch estimates the OpCo would be unable to repay its secured debt obligations by 2012. This is notable because assuming HoldCo note maturities are not extended beyond 2013, Fitch believes bank lenders would want a restructuring to involve the secured debt being repaid in advance of 2013 (when the company faces a high level of HoldCo debt maturities ($2.2 billion) in addition to other various OpCo maturities and amortizations ($1.1 billion). Leverage through the banks at RHDI is less than 3x, so restructuring the amortization could be possible at an incremental interest cost that would further reduce free cashflow. The 'B-/RR3' rating on the RHDI bank debt reflects Fitch's belief that 51%-70% recovery is reasonable. Total OpCo leverage is approximately 3.75x meaning that after the 35% latest 12- month (LTM) EBITDA haircut and a 3.5x multiple, the senior unsecured notes receive negligible recovery (0%-10%).

Dex Media East (DXE)

Fitch believes DXE is the healthiest of the OpCos. It has a more manageable maturity schedule, covenant flexibility and only one class of debt (which could make negotiations less complicated than at other OpCos). Although it appears to have the capacity to manage its capital structure organically, the 'CCC' IDR reflects the expectation of continued operating deterioration and the risk that it may continue to distribute dividends to the HoldCos. Also, weakness at other entities and actions that the HoldCo's may take (e.g. forcing all OpCos into bankruptcy) make full de-linkage unrealistic and make default at DXE a real possibility in Fitch's view. The 'B-/RR3' rating on the bank debt reflects Fitch's estimates that in a distressed scenario (35% decline in LTM EBITDA that would violate covenants and a 3.5x multiple), bank debt is estimated to recover 51%-70%.

R.H. Donnelley Corp and Dex Media, Inc. (RHD and DXI)

The 'CC' IDR on both RHD and DXI reflect Fitch's belief that default of some sort appears probable. These entities are structurally subordinated in the overall complex and exposed to the significant risk that bank lenders could restrict payments out of the OpCos as part of a broader restructuring of the company. While refinancing at the HoldCos does not pose a meaningful near-term risk (until 2013 as described above), Fitch believes there is a material risk of a debt exchange (that could be considered a DDE and would represent a default) that could attempt to extend the maturity date of these obligations in order to enhance the repayment prospects of the secured lenders. While there is cashflow (from OpCo distributions) available to service interest on these obligations under normal business conditions, the 'C/RR6' ratings reflect that under a distressed scenario these distributions could be reduced by 100% reflecting a 0% recovery. Further, Fitch points out that these obligations have historically been and are prospectively expected to be dependant on a functioning refinancing market, as OpCo distributions are not sufficient to repay principal even under favorable business conditions.

Fitch understands that there are a number of alternatives available to the company and its lenders given the free cashflow dynamics of the business and the complexity of the capital structure. Fitch also recognizes that if the OpCos were to cut distributions to the HoldCos, the HoldCos could force the OpCos into bankruptcy. As there is more clarity regarding the likelihood of certain options, Fitch could take further actions.

For further information, see Fitch's July 28 report, 'R.H. Donnelley Corp - Cost of Flexibility and Challenges of Deleveraging', available on the Fitch Ratings web site at www.fitchratings.com. The report also includes coverage of the subsidiaries listed above.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.

SOURCE: Fitch Ratings

Fitch Ratings Mike Simonton, CFA, 312-368-3138, Chicago Rolando Larrondo, 212-908-9189, New York or Media Relations: Cindy Stoller, 212-908-0526, New York Email: cindy.stoller@fitchratings.com