A lesson from Yell in the dangers of debt

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.

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.

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.

Chart 3: Yell’s profits

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

 

Ouch!

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.