Fitch Affirms Dex Media East, West & Dex Media, Inc. at 'CCC+'; Outlook Stable

Business Wire, June 16, 2004

CHICAGO -- Fitch Ratings has affirmed the following Dex Media's subsidiaries, Dex Media East LLC (DXME) and Dex Media West LLC (DXMW). Specifically, Fitch has affirmed the following DXME ratings:

DXME

-- $1.1 billion senior secured credit facility 'BB-';

-- $450 million senior unsecured notes due 2009 'B';

-- $525 million senior subordinated notes due 2012 'B-'.

DXMW

-- $2.1 billion senior secured credit facility 'BB-';

-- $385 million senior unsecured notes due 2010 'B';

-- $780 million senior subordinated notes due 2013 'B-'.

In addition, Fitch has assigned a 'CCC ' rating to the holding company's, Dex Media Inc. (Dex), $500 million 8% notes due 2013 and its $750 million 9% aggregate principal discount notes due 2013, which has a current accreted value of $512 million. Approximately $6.3 billion of debt is affected by Fitch's actions. The Rating Outlook is Stable.

Fitch's ratings recognize the high degree of leverage, which resulted from the acquisition of DXMW and DXME from Qwest Communications completed on Nov. 8, 2002 and on Sept. 9, 2003, respectively. The senior unsecured and senior subordinated ratings mainly reflect weak credit metrics and, to a lesser extent, the amount of secured debt at DXME and DXMW, which currently represents 47% and 48% of their respective capital structures. The 'BB-' ratings on the DXME and DXMW bank facilities reflect their secured position. While the operating businesses lack significant tangible assets, intangibles include valuable customer lists and non-compete agreements.

The ratings also reflect competition from independent directory publishers that compete on price and usage substitution with internet directories. Long-term risks relate to potential changes in the buying patterns of advertisers or a shift in the effectiveness of yellow page advertising relative to other media, as well as the success of new product innovations launched by the company.

These risks are offset by the strong market position of each incumbent directory publishers within its service territories, the stability and consistency of their revenue streams, strong operating margins, and solid free cash flow generation. Revenue stability at DXME and DXMW is supported by a high advertiser retention rate (91%) and the directory industry's modest sensitivity to cyclical economic conditions. The subsidiary businesses also provide good geographic and customer diversity. Ongoing capital expenditures to support its business are expected to remain low.

Dex's 'CCC ' rating reflects the structural subordination of debt at the holding company, which has no operating assets and relies on dividends from these subsidiaries for debt service. Through various debt offerings from November 2003 through March 2004, Dex issued debt of approximately $1 billion, with proceeds used to pay dividends to its equity sponsors.

Pursuant to a proposed $1.5 billion IPO of Dex shares, the company plans to reduce debt at the subsidiaries with a portion of the IPO proceeds. Dex intends to reduce debt by $437 million ($174 million of subsidiary debt at DXME and $263 million of subsidiary debt at DXMW). Consolidated total debt/EBITDA leverage (pro forma for acquisition effects and IPO transaction while excluding effects of purchase accounting) during the latest twelve months ended March 31, 2004 is anticipated to decline to 6.4 times (x) from 6.8x. Leverage at DXME is anticipated to decline to 4.7x from 5.2x and at DXMW to decline to 5.6x from 6.1x, pro forma for the transaction.

Dex also intends to redeem the Dex Media, Inc. series A preferred stock for $127 million, with a portion of the IPO proceeds. In addition, Fitch expects a portion of the IPO proceeds to be distributed to the company's sponsor group, which to date has recouped $1 billion out of a total $1.6 billion investment in DXME and DXMW. Dex's ongoing financial policy will be closely monitored, as the company has announced plans to make common stock dividend payments when permissible. However, the terms of the subsidiaries' credit facilities and the indentures governing the unsecured subsidiary debt significantly restrict subsidiary dividend payments for purposes other than satisfying Dex interest expense.

Fitch expects the available balances under the revolving credit facilities, combined with operating cash flow, to provide adequate liquidity. At March 31, 2004, DXME and DXMW each had $100 million available under its respective revolving credit facility. Furthermore, liquidity is enhanced by free cash flow generation at DXME and DXMW during 2004. At March 31, 2004, maturities were manageable with $76 million of short-term debt at DXME and $33 million of short-term debt at DXMW. Cash flow available for dividends, after mandatory subsidiary debt amortization, is expected to remain in excess of the $40 million of interest expense on Dex Media Inc.'s $500 million 8% senior notes due 2013.