Credit Rater Fitch: Thumbs Down on McClatchy Debt Exchange

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By: Mark Fitzgerald

Reacting to The McClatchy Co.’s offer Thursday to exchange $1.15 billion in notes for cash and new notes that have deeply discounted face values but paying high interest, Fitch Ratings downgraded its credit ratings — and warned of a “real threat of bankruptcy” by the nation’s third-largest newspaper publisher.

In a note by Chicago-based credit analyst Mike Simonton, Fitch downgraded McClatchy’s “issuer default rating” (IDR) to C, a rating that it says “signals imminent or inevitable default.”

As reported, McClatchy is offering certain big investors the chance to exchange $1.15 billion in debt that matures between 2011 and 2029 for as much as $60 million in cash and up to $175 million in new five-year notes that have a yield of 15.75%. The notes McClatchy is offering to exchange have yields ranging from 4.63% to 7.15%.

McClatchy has some $2.1 billion in debt, mostly amassed to make the blockbuster acquisition of Knight Ridder in 2006. Because ad revenue is falling industrywide, McClatchy has been unable to pay down that debt as rapidly as it would like, and some credit analysts have said the chain might violate terms of its loan agreements as early as 2010, putting it in at least technical default.

The debt exchange would lower its debt burden.

Fitch, though, said it regards the debt exchange as a “restricted default,” said the offer amounts to a “coercive debt exchange.”

The deep discount in face value and extended maturities of the notes changes the note terms significantly, Fitch said. “Secondly, Fitch views the offer as coercive, because old bondholders that do not participate in the exchange risk being further subordinated to the proposed $175 million of new notes,” the agency said. In its announcement, McClatchy said the old notes would be subordinated to the new notes — that is, paid after the new notes — in the event of a default.

“Also, in Fitch’s view there are exceptionally high levels of credit risk and a real threat of bankruptcy,” analyst Simonton wrote. “Fitch notes that more than five newspaper groups have filed for bankruptcy protection in the past six months.”

An analysis of the McClatchy offer and the entire Fitch note are posted at E&P’s business-oriented Fitz & Jen blog.

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