Yell Group, the heavily indebted publisher of Yellow Pages, is suspending dividends until its £3.7 billion debt mountain has been reduced to more manageable levels.

The company, which owns directory enquiries and classified websites around the world, also said today that it was negotiating with its main banks for a relaxation in banking covenants and an agreement in principle had been received.

Yell said reaching a final agreement is expected to take several weeks. In July, Yell tried to reassure investors by dismissing fears that it was in danger of breaching these covenants.

The company said this morning it aimed to cut debts to less than four times earnings before interest, tax, depreciation and amortisation as fast it it could. Until then, dividend payments would be suspended.

Yell said trading and financial performance continued to be on track to meet market expectations, with strong cash generation, and that it was currently operating within its financial covenants.

The share price rose 3.5 per cent, or 3.25p, to 94.5p on the news.

“It is encouraging to see Yell addressing the balance sheet issue and arranging greater covenant flexibility,” Charles Peacock, a Landsbanki analyst, wrote in a note, estimating that cancelling the dividend would free about £70 million in cash per year.

The company, which borrowed heavily to finance acquisitions in the United States and Spain, reported a 6.2 per cent rise in third-quarter revenues in July and said at the time it had reduced its total debt burden by 2 per cent compared with three months earlier.

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.

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