Merryn's Blog

A lesson from Yell in the dangers of debt

In a classic case of the devastating damage that spiralling debts can do to a company, things are looking increasingly bleak for directories group Yell.

The situation is looking ever more bleak for directories group Yell (LSE: YELL).

The Yellow Pages provider now has just 24 hours to keep its creditors onside. It's a classic case of the devastating damage that spiralling debts can do to a company.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The charts below tell the sorry tale.

In early 2007, Yell was riding high. The company's share price was standing above £6, having more than doubled in three years.

Advertisement - Article continues below

But that wasn't enough for the directories group.

It decided to step up its acquisition spree by more than doubling its net borrowings (see below)

Chart 1: Yell's net debt (figures in £m)


to a level more than twice its turnover and more than eight times its operating profits. As you can see above, the current debt level is £3.76bn.

That, in turn, forced up the group's quarterly interest bill (see below)

Chart 2: Yell's interest expense


to a cost of more than £80m every three months, a four-fold rise on early 2006.

That's not a problem when things are going well. Trouble is, as we now know, this was the top of the market. Advertising spending started to be chopped back. So, as you can see below, Yell's profits nosedived.

Advertisement - Article continues below

Chart 3: Yell'sprofits


Worse still, last year the group had to make a huge £1.3bn write-down of one of its acquisitions. In other words, it was admitting it had paid well over the odds. That's blown a huge hole in Yell's reserves (see below)

Chart 4: Yell's reserves


which have fallen to -£657m. That in turn has seen its share price dive by 93% from the peak (see below).

Chart 5: Yell's share price



And the pain isn't over yet. Most of that debt is still there. And Yell now needs to refinance it. Lenders might have been happy to advance loads of money three years ago, but now, understandably, they aren't too keen to stump up more cash.

So things don't look good for Yell. The deadline for dealing with the debt has been extended until tomorrow, so we'll soon find out if the group will go bust.

But whatever the outcome, it's a salutary lesson about the big dangers of running up huge debts relative to sales and profits. When times get tougher, those borrowings can really bite back.



Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Most Popular

UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020

Money Minute Friday 14 February: The latest from RBS, Britain's state-owned bank

Today's Money Minute previews results from RBS – Britain’s state-owned bank – and from pharma giant AstraZeneca.
14 Feb 2020

Living on a houseboat: the pros and cons of a floating home

Living on a houseboat sounds romantic and peaceful. But it’s not as straightforward as it looks, says Nicole Garcia Merida
14 Feb 2020

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019