Poor Revenue Growth Might Lead S&P To Downgrade Yahoo

Yesterday, Standard & Poor’s (“S&P”) cut its unsolicited rating outlook on Yahoo! Inc. (YHOO – Analyst Report).

S&P cited two reasons — meager revenue growth and elevated costs for obtaining traffic — for lowering its outlook from stable to negative.

Unsolicited Rating Outlook

An unsolicited rating is an agency’s evaluation of a borrower’s creditworthiness without any participation of the borrower. Basically, the borrower does not pay for the rating assessment.

Currently, S&P has a BB+ rating on Yahoo, while its competitor, Microsoft Inc. (MSFT – Analyst Report), has a credit rating of AAA. Yahoo has lagged its competitors in terms of credit ratings due to elevated defections and increasing qualms over management’s capability to turn the company around.

In a statement, S&P said, “We could lower our rating on Yahoo if the company’s competitiveness in its display or search advertising businesses continues to decline and it is not able to reverse the negative operating trends affecting earnings before interest, tax, depreciation and amortization (EBITDA).”

Nearly a double-digit percentage decline in revenues, (excluding traffic acquisition costs), according to S&P, could point to a declining competitive position.

The credit rating agency also was quick to point out that any debt-funded scheme to gratify shareholders or acquire a company could also lead it to further lower Yahoo’s credit rating.

However, S&P also mentioned that it might reconsider its position in the light of a few factors. These include the development and efficient accomplishment of a business plan which would result in Yahoo maintaining its market share; enhancement of the way it monetizes its assets, and reverse the slump in EBITDA.

To attain a revision, Yahoo will also have to exhibit its capability to improve its market share in search and display advertising.