Fitch Initiates 'B+' IDR on R.H. Donnelley; Upgrades Dex Media's IDR to 'B+'

Business Wire, Jan 11, 2006

CHICAGO -- Fitch Ratings has initiated rating coverage on R.H. Donnelley Corp. (RHD) by assigning a 'B ' Issuer Default Rating (IDR) and a 'CCC ' rating to RHD's senior unsecured notes. Fitch has also assigned specific issue ratings to R.H. Donnelley Inc. and has revised ratings on Dex Media Inc. (Dex) and its wholly owned subsidiaries, Dex Media West and Dex Media East (Listed at the end of the press release). All Dex ratings are removed from Rating Watch Negative where they were placed Oct. 3, 2005. The 'B ' IDR applies to each of the five issuing entities. The rating action affects approximately $8.5 billion of debt outstanding at Sept. 30, 2005. The Rating Outlook is Stable.

The rating actions reflect the significant pro forma respective and consolidated debt loads of the holding and operating companies of RHD and Dex , the intense competition from independent directories, increased usage of online (and threat of wireless) search, the risk of further debt financed acquisitions, limited tangible asset value,recovery prospects in distress and the structural subordination present within the capital structure. These risks are balanced somewhat by strong and historically stable free cash flow generation (supported by healthy operating EBITDA margins and strong free cash flow conversion), management's track record at reducing debt levels (at both RHD and Dex), and solid geographic and client diversity. The ratings also incorporate the combined company's enhanced scale and strong market position as the incumbent directory publisher within its service territories.

Fitch recognizes the historical stability of the combined company's revenue base and cash flow has been supported by the combined company's high advertiser retention rate (85-90%), the contractual nature of the combined company's revenues, low ongoing capital expenditures and a business model that is less sensitive to advertising revenue cyclicality than other media. The combined company will have more broad geographic diversity as there is very little overlap of operations, improving its capacity to withstand a downturn in one of its regions. The new RHD will have more than 600 directories, a circulation of over 73 million, 660,000 advertisers and over 1,800 sales reps. The combined company will operate in 28 states.

Fitch believes that management's exclusive focus on the yellow pages business has helped it grow faster and be more proactive about addressing competitive threats than regional bell operating company (RBOC) subsidiary incumbents. However, in Fitch's view, revenue growth and EBITDA margins will continue to face pressure from the significant competition represented by independent print directories and online players. As print usage has been flat to slightly down the past several years, the number of print yellow pages advertisers has declined slightly and advertising revenue although increasing, has increased at a declining rate in the United States, reflecting the reduced capacity of incumbent players to increase advertising rates. Independents like Yellow Book have experienced swift growth and represented 20% of the yellow pages market in 2004 compared with less than a 5% share ten years ago. However, Fitch believes that in some cases this competition leads to higher costs for advertisers (instead of lost revenue for the incumbents) as many of them choose to be in both directories as the opportunity cost on the part of advertisers leads to a level of 'stickiness' for many of the 660,000 unique advertisers.

Fitch believes RHD and Dex advertiser revenue is less susceptible to potentially swift and widespread pressures felt by other traditional print media under a downturn scenario or against the backdrop of a secular shift.

In addition to print competition, the growth of online advertising has been dramatic and poses a threat to all traditional media companies. Internet revenues make up only a 4% sub-segment of yellow pages industry advertising, but online yellow pages advertising overall is experiencing dramatic growth of 15-25%. RHD, and to a greater degree, Dex, have been active in addressing the threats posed by online players and currently have online local search capabilities in all of their markets (Dex Online, www.smartpages.com, www.chicagolandyp.com, among others). Fitch believes that the combined company's sales force and advertiser relationships make it a valuable and complementary strategic partner for online search engines over the intermediate term. Fitch recognizes that while there could be margin compression during the shift toward online usage, there could also be longer-term pricing and margin expansion in the online advertising offering as ROI (return on investment) becomes clearer and as the internet becomes a more significant outlet for media advertising.

Fitch believes that the five issuing entities bear the same risk of default and thus share the same IDR. Fitch believes that cash flows of all three operating subsidiaries are meaningful to the pro forma debt service capability of RHD Corp. and if available, that support would be offered to any of the three subsidiaries in financial distress because they are each strategically important and material contributors to the consolidated entity. RHD Corp is structurally subordinated to RHD Inc and Dex Media Inc., and is dependent on dividends of RHD Inc and Dex Media Inc. to support its sizeable debt load. Consistent with the granularity of Fitch's Recovery Methodology, the individual security ratings reflect the determination and application of prospective recovery in a stressed scenario and are notched accordingly.