CORRECTED - Idearc, RH Donnelley may seek bankruptcy-Moody's

(Corrects R.H. Donnelley's headquarters to Cary, North Carolina in second paragraph)

NEW YORK Feb 9 (Reuters) - Moody's Investors Service on Monday warned that directory publishers R.H. Donnelley & Sons RHDC.PK and Idearc Inc IDAR.PK may be each likely to pursue a prepackaged bankruptcy or distressed debt exchange as they struggle to overcome high debt loads.

Moody's cut its R.H. Donnelley's corporate family rating to "Caa1," seven steps below investment grade and an extremely speculative rating, and cut the Cary, North Carolina-based company's probability of default rating to one step lower at "Caa2."

The corporate family rating of Idearc, the publisher of the Yellow Pages directories, was also cut two steps to "Caa2," eight levels below investment grade, and its probability of default rating was cut one step lower at "Caa3."

Both companies are suffering from a bigger drop in advertising revenues than was previously expected, Moody's said.

"Moody's had previously considered it likely that (R.H. Donnelley) would continue (but likely substantially expand) the scope of its recent debt repurchase activities to effect a reduced debt profile and improved credit metrics," Moody's said in a release.

However, "a pre-emptive restructuring now seems to be a more viable alternative given current market conditions, which are expected to facilitate a more expedient solution to alleviate the company's financial strain," Moody's said.

Prepackaged bankruptcies are filed when a company reaches an agreement with debtholders prior to filing for court protection.

Donnelley had $3.12 billion in long-term debt as of September 30, according to a regulatory filing.

The downgrade of Idearc also reflects an expectation that the company will need to put into effect a comprehensive restructuring.

Additionally, the downgrade "reflects our view that Idearc may experience declines in its advertising sales at a far greater pace than we had previously contemplated, reducing its free cash flow and increasing the likelihood that the company will fail to comply with its financial covenants over the near term," Moody's said.

Idearc had $8.93 billion in long-term debt as of September 30, a regulatory filing shows.

Credit default swaps insuring R.H. Donnelly and Idearc's debt against default are trading at extremely distressed levels, reflecting a view that a bankruptcy is highly likely.

R.H. Donnelley's credit default swaps cost 83 percent the sum insured upfront, or $8.3 million to insure $10 million in debt for five years, according to Markit Intraday.

Idearc's credit default swaps are also trading at 92.5 percent upfront, or $9.25 million to insure $10 million in debt, Markit data shows. (Reporting by Karen Brettell; Editing by Jonathan Oatis)