Payment Default Impending on Yellow Pages Securitization

Another dubious milestone was reached on Friday: Local Insight Media Finance’s ratings were lowered to ‘D’ by S&P.  These downgrades follow a series of ratings reductions for these whole business securitizations backed by cash flow generated by yellow pages phone directories.  These ratings reflect the failure of these securitizations.

The immediate cause of these downgrades were the securitizations’ “partial payment of insurer premiums,” on this month’s payment date, “which the indenture defines as an event of default,” 1.  This payment default is significant in and of itself, particularly as the obligation to pay these premiums ranks high on the securitizations’ payment waterfall schedule.

The total depletion of the securitizations’ interest reserve accounts this month and the conclusion that “…full interest is not expected to be paid next quarter…” 2 is even more significant.  The securitizations have not been generating enough cash flow to cover their basic interest expenses, much less repay outstanding principal.  Now the situation is so dire that even the interest reserve accounts have been exhausted.

The interest reserve accounts, funded at closing in amounts sufficient to cover 3 months of interest expense, are designed to provide liquidity to the securitizations and to ensure that interest payments continue to be paid in the event that the securitizations’ cash flows are temporarily interrupted.

In the normal course of events they should not be drawn at all.   Now they’ve been drawn completely, due to a permanent diminution of cash flow, and are gone.
Less than six months ago, in its previous negative rating action on these securitizations 3, S&P noted that:

“In the event the outstanding series continue to receive the same level of cash flows and expenses remain where they are, the deals will completely empty the reserve account in the next three quarters, resulting in an interest shortfall…” (emphasis mine)

It took only two more quarters to exhaust this interest reserve account, not three.  Apparently cash flow declined even more dramatically in the past few months than anticipated or S&P’s short-term forecast of cash flow in these securitizations was off.

Moody’s, in a September 2012 rating action 4 that lowered its ratings on these notes to ‘C’ (its lowest rating), noted that “We expect that the reserve account will be depleted by the end of 2012 or early 2013, leading to a default in the payment of interest on the notes.”

These securitizations’ credit supports have proven to be woefully inadequate to cover the rapidly diminishing cash flow that is actually coming in.  Having passed the point when these securitizations generated sufficient cash flow to cover their interest payments and having exhausted the interest reserve account, a payment default on these notes is forthcoming.  Full repayment of these notes is a near-impossibility; ultimately, the severity of loss will be extremely high.

This short “Judicious Note” highlights S&P’s related comments on its most recent downgrades to these securitizations.

For additional analysis and commentary about these securitizations, please refer to two previous blog posts first published on this site, “A Bad Whole Business Securitization”, , published November 1, 2012, and “Rapid Amortization Doesn’t Help When There’s No Cash”, , published December 14, 2012.

Judicious Note, by Avi Oster, Managing Director, Judicious Advisors LLC

Posted 4-24-13


  1.  “Local Insight Media Finance LLC Series 2007-1 And 2008-1 Ratings Lowered To ‘D’ After Missed Insurance Premium Payment”, Standard & Poor’s RatingsDirect, published April 19, 2013
  2. Ibid.
  3. “Local Insight Media Finance LLC Series 2007-1 And 2008-1 Ratings Lowered On Two Classes; Two Others Withdrawn”, Standard & Poor’s RatingsDirect, published December 11, 2012
  4. “Rating Action: Moody’s downgrades notes in the Local Insight Media Finance whole-business securitization, Moody’s Investors Service, published September 10, 2012





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