THE classified directories group Yell has begun negotiations with its leading banks to restructure its £3.7 billion debt pile.

The company, whose shares have been dragged down this year on fears that it could default on its banking covenants, has asked long-time adviser Rothschild to lead the discussions.

Yell’s borrowings are the legacy of an acquisition drive during which it bought classified directories in America and Spain.

It is understood to have asked its main banks to reset the terms of its borrowings to give it greater headroom. In return for new covenants, interest rates on Yell’s loans are likely to be raised from 7% by at least 100 basis points and perhaps to 9% annually.

The banks will consider the proposal before presenting it to a syndicate of around 300 institutions that have taken on smaller portions of the company’s debt. However, the plan does not require 100% approval.

Yell’s lead lender is HSBC. It was part of a group including Citigroup, Deutsche, and Goldman Sachs that put in place a senior credit facility worth up to £4.65 billion when Yell bought Spanish publisher TPI from Telefonica in April 2006.

Yell’s management, led by chief executive John Condron, believes the company is able to remain within its banking covenants, but a new deal would give it significant breathing space over the coming months.

It has chosen to act now to give it headroom while the credit markets remain frozen over. If current financial conditions continue, it would make plans to diversify its debt – perhaps through a bond issue next year – extremely difficult.

Yell, which owns Yellow Pages and directory enquiries line 118 247, has facilities in place until April 2011 and cash generation has been ahead of schedule. The company reported that debt had been reduced to 4.9 times earnings at the June from 5.1 times three months earlier. However, it still slashed the dividend to save money.

Yell was sold by BT for £2.1 billion in 2001 to private-equity firms Apax and Hicks, Muse, Tate & Furst, which were attracted by its reliable cash flows. It returned to the stock market in 2003, priced at 285p a share, soaring to 643p in February 2007, when it was valued at close to £5 billion.

Concerns about the weakening economy, threats posed by rivals such as Google and its debts drove the shares down to 55p in July.

“The perception is that the business model is broken,” Condron told The Sunday Times in March. “It is emphatically not.”

The shares have since recovered modestly, closing last week at 91p, valuing Yell at £711m.

Caution over credit will become an issue for dozens of companies seeking to renegotiate their loan terms in the next 12 months.

Condron, who joined BT in 1979 before switching to Yellow Pages a year later, has sold shares worth £20m in Yell since it floated and prior to its share-price collapse.

The company’s recent performance has not gone down well with investors who staged a protest at its annual meeting in July. Shareholders were also angry about Conron’s bonus, which was 110% of his annual salary despite failing to meet revenue targets.

He received £935,000 on top of his £850,000 salary while financial director John Davis picked up a further £555,000 as well as an annual salary of £505,000.

The group posted revenue for 2008 of £2.2 billion, an increase of 7% on the previous financial year. Underlying earnings were £739m, a 9% increase on 2007.

The company began as a single classified section in the Brighton telephone directory in 1966. Today it has around 13,000 staff worldwide. Yell declined to comment.

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