A majority of Yellow Media’s YLO-T (YLO-T0.09—-%) creditors have hashed out a plan to take over the troubled phone directory company in a bid to salvage their investments.

The company’s senior bondholders organized a conference call last week to discuss their plan to encourage management to restructure the balance sheet by swapping debt for equity, ultimately giving the bondholders control. The plan is still in early stages, and a formal letter to be put forward to Yellow Media is now being drafted.

At the moment, bondholders aren’t expressing any desire to shake up Yellow Media’s management team; they simply hope to extract some value for their investments. Though the company still has positive cash flow, its outlook is fading.

“If, for some reason, we get paid in equity, it’s never optimal, but it’s probably acceptable because it’s got a value,” said Paul Gardner, a portfolio manager at Avenue Asset Management, who participated in the discussions.

Plus, bondholders believe that it is better to put together a plan ahead of time so that chaos doesn’t ensue if Yellow Media eventually can’t make an interest payment or roll over existing debt.

“It’s much better to have everything in place in an orderly restructuring than putting a gun to the debt-holders’ heads,” Mr. Gardner said, adding that it can get “nasty in court.”

Yellow Media currently has about $1.5-billion in debt outstanding. The company has been shedding divisions and eliminated its dividend last year to redirect money to debt servicing.

The discussions are being met with derision by some equity holders, who suggest the company can’t just roll over those who own shares. Glen Bradford, chief executive officer of ARM Holdings, said the bondholders “purposefully” leaked news of their meetings to the media in order to increase the value of their holdings.

“The goal of promoting this to the media is to talk their own book,” he said. “As an equity holder, I am still failing to see how the creditors have any say in the matter as long as the company continues to meet their debt obligations as they come due.”

In February, Yellow Media said it would undertake a review to determine what to refinance, saying “every option” was on the table.

“It may involve the issuance of secured or unsecured debt,” chief executive officer Marc Tellier said in a conference call at the end of its last quarter. “It may involve equity. It may involve other securities or other transactions. But I think it would be irresponsible at this time to speculate beyond that. I mean, we are really looking now at evaluating all of our alternatives to refinance our maturities.”

Shareholders have seen the value of their investment drop by 98 per cent in the last year as the company struggles to compete in the digital space. Earlier this year the company decided to reduce the number of books it publishes, close offices across the country and lay off an undisclosed number of employees as it shuttered its Canpages division.

Yellow Media recently added three new board members, including Bruce Robertson, a restructuring expert who formerly worked for Brookfield Asset Management Inc., and David Leith, the former head of investment banking at CIBC World Markets.

DBRS analyst Chris Diceman issued a report last week in which he downgraded the company’s debt, saying that it looked increasingly likely that in order to meet its obligations, it would need to come to some sort of agreement with debt holders.

He said the company’s unsecured debt has “average recovery prospects,” with a 30-to-50 per cent chance of repayment. He estimated there’s a 10 per cent chance the company’s subordinated debt would be repaid.

“We believe that the likelihood that the company’s financing activities will involve some form of compromise for existing creditors has increased to a level that is no longer consistent with the previous ratings,” he wrote.

Equity analysts have long held that the company’s shares were worthless, with several issuing $0 price targets for the units. Their main concern has been the company’s difficulty duplicating its former print success in a digital world.

Yellow Media didn’t immediately return calls. Communications manager Hind Ounis left the company late last month.

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