Yell, the debt-laden Yellow Pages publisher, has suspended its dividend and is renegotiating its bank covenants as it tries to reduce its £3.7 billion debt pile and reassure nervous investors.

The group, which has a market capitalisation of £711 million and whose shares have fallen by 77 per cent in the past year, faced criticism in recent months from investors and analysts who believed that it was close to breaching banking covenants and required action.

The group said yesterday that it was negotiating with its main banks for a relaxation in its covenants and that an agreement in principle had been reached. Yell said that a final agreement would take several weeks.

In recent months the group had said that its financial position was secure and that no dramatic measures needed to be taken in light of its large debt mountain.

John Davis, the chief financial officer of Yell, told The Times in June that the company was not in danger of breaching the covenants after nervous investors expressed concern. Several shareholders called for decisive action from the group’s management, amid concerns over a falling share price and high levels of debt.

Richard Marwood, a fund manager for Axa Investment Managers, said at the time: “Yell’s management needs to take decisive action, as the odds of the group staying safe is small . . . A slowing economy is not good for Yell. They may have to look at a debt-for-equity swap, as they are probably too late for a rights issue.”

Another institutional shareholder said: “It looks challenging for Yell at the moment and they will need to do something. The market does not want such levels of gearing at the moment.”

However, when these comments were put to Mr Davis, he insisted that the group had the full backing of its leading shareholders, which include Invesco, with a stake of about 17 per cent, and was not close to breaching its banking covenants. Invesco declined to comment.

“We are comfortably supporting our level of debt. A rights issue, asset disposals or debt-for-equity swap is not needed,” Mr Davis said in June. “We may not be recession-proof, but we do have resilience . . . The way to prove wrong any negative comments about Yell is to deliver. We believe our shareholders are fully behind us.”

Yell outlined a number of measures to provide greater flexibility “given the continuing challenging conditions in the credit markets and the wider economy”. In its statement to the market yesterday, it said that its trading and financial performance continued to be on track to meet market expectations, with strong cash-generation leading to lower levels of indebtedness.

The suspension of the dividend was not the first time that Yell has made such a move. On May 20, Yell shares fell by nearly 22 per cent after it said that it would halve its dividend to help to shore up its balance sheet.

Shares in the group closed down 4¾p, or 5 per cent, at 86¼ yesterday.

Then and now

What John Davis, chief financial officer, said in June and July:

“Our cashflow is strong and we are comfortably making repayments . . . The important thing is that our business is able to support a decent amount of debt. We are not getting calls from the banks demanding meetings because they are worried about the debt”

What Yell is saying now:

“Yell intends to seek additional financial flexibility from its lenders through an increase in its future covenant headroom . . . Yell aims to reduce its indebtedness to under four times earnings before interest, taxes, depreciation and amortisation, as rapidly as it may”

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