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Yellow Pages cuts payout (Don't shoot messenger)

awillis@globeandmail.com

Back in early February, analysts began to flag the fact that a distribution cut was inevitable at Yellow Pages Income Fund. YLO.UN-T

Those forecasts knocked the stuffing out of Yellow Pages: Units in the trust dropped 15 per cent in the wake of a BMO Nesbitt Burns report in which analyst Tim Casey highlighted the "unattractive options" facing the phone directory company.

While recognizing the strength of the Yellow Pages franchise and its management team, Mr. Casey warned that the company faced serious headwinds, in the form of weak advertising markets and debt servicing costs. He concluded that trimming cash payouts was the sensible course, and downgraded his recommendation on the trust.

In the weeks that followed, a number of other analysts took the same pessimistic view. These predictions, and the coverage of Yellow Pages that followed in this column, drew an interesting response from readers.

A number of e-mails, from individual investors, were critical of the media and the Street for taking a negative view on what they saw as a great Canadian success story. The tone of these missives was along the lines of something mom would say: "If you can't say something nice, don't say anything at all." (The criticism came at the same time Jon Stewart eviscerated Jim Cramer for CNBC's cheerleading business coverage.)

No one e-mailed to say thanks for the warning.

Well, yesterday, Yellow Pages cut distributions by 30 per cent to 80 cents annually. It was the right thing to do. A blue-chip management team is now better positioned to build the media company in the face of brutal business conditions.

So what are the analysts saying now?

BMO's Mr. Casey fired out a report early yesterday that said performance, while weakened by the recession, remained solid and, "more importantly, the distribution cut provides added financial flexibility."

"The company also introduced a payout framework for 2011 of 60 to 70 per cent of cash earnings," said Mr. Casey, looking ahead to a time when Yellow Pages must convert from a trust to a traditional common stock structure. "Given the relative underperformance of the stock and the positive financial implications of the distribution cut, we are raising our rating to market perform from underperform."

Corporate bond bonanza

Before diving into the sea of bonds that flooded Canadian markets earlier this week, consider what's going on in the mutual fund world these days.

Burned by losses on stocks during the market meltdown, Canadian investors have cut their purchases of equity funds by 49 per cent, year over year, according to Investment Fund Institute of Canada data from the end of March. Sales of balanced funds - stocks and bonds - are down 40 per cent. Where is the average investors money going?

Sales of safe, income-generating bond funds are up by an eye-popping 33 per cent, year over year, according to IFIC. Through the first three months of the year, IFIC calculates that bond fund managers had to find a home for $4-billion of new money, while reinvesting cash generated from bonds that matured.

It's contrarian investing - the time to be buying bonds was last year, while stocks seem relatively cheap this year - but fund managers can't fight the trend. Cash is pouring into fixed-income funds, and it needs to be deployed. That has kicked off what may turn out to be a record-setting run of corporate bond sales.

In the wake of a blockbuster $4.2-billion (U.S.) high-yield financing from Teck Resources on Tuesday, a string of borrowers hit the market on Wednesday.

Manitoba Telecom Services, MBT-T an investment-grade borrower, sold $350-million (Canadian) of three- and five-year bonds in a financing led by RBC Dominion Securities and Scotia Capital.

Husky Energy HSE-T raised $1.5-billion (U.S.) in a five- and one-year offering that was led by Citigroup, HSBC and RBC Dominion Securities. Give credit to RBC for its ability to land assignments selling Canadian bonds denominated in foreign currencies.

Canadian Oil Sands COS.UN-T sold $500-million of 10-year debt in a financing led by Bank of America and HSBC. And in one final financing that was aimed at the income crowd, Co-operators General Insurance Co. sold $100-million (Canadian) of preferred shares, in a deal led by Scotia Capital and TD Securities. The new shares feature a 7.25 per cent dividend.

© 2007 The Globe and Mail. All rights reserved.

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