Debt Watch: Analysts Rate the Debt Burden

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Ask stock or bonds analysts who they think is wobbling the most under the weight of their debt, and the same names come up.

Journal Register tops nearly all the companies as being in the worst shape. But among the companies repeatedly cited as distressed is Tribune, which is losing cash flow even as it bulked its debt up to $13 billion.

The McClatchy Co. also makes the list, even though analysts simultaneously praise it for its conscientious efforts to draw down debt under almost no-win circumstances. A few analysts look at Lee Enterprises Inc. in a similar light.

Names repeat, too, when stock and bond analysts are asked to name which com- panies are managing debt comfortably. Gannett Co. and The New York Times Co. are frequently mentioned.

Long-term debt levels and ratings agency assessments are listed (see above chart). Here are capsule reviews of the debt situation of select newspaper publishers on both sides of the debt red line.

Journal Register Co.
So little has gone right for Journal Register in the last year it’s easy to forget that not long ago it was lauded for taking a bold step to grow top-line revenue, and that in 2007 it reduced debt by more than $100 million and its $90.3 million in EBITDA easily covered its interest expense of $38.5 million.

So what happened? Edward Atorino, the managing director of Benchmark Capital, has a quick answer: “Michigan happened.”

Journal Register spent more than $500 million, the great majority of it borrowed, to buy four dailies in the Detroit suburbs and build a new plant just before the auto industry slump plunged Michigan into what was then a one-state recession.

Other chains, such as McClatchy and Lee, have made similarly ill-timed blockbuster acquisitions, but they’ve had more flexibility than Journal Register, where “earnings just evaporated really fast,” says Atorino.

But Journal Register’s debt, some $650 million, did not evaporate. That’s the trouble with debt, Atorino adds: “The debt doesn’t go away ? it just sits there.”

Journal Register’s debt-to-EBITDA ratio is about 7 times, a level, says Morningstar equity analyst Tom Corbett, when “alarm bells go off.”

Poor financial results hammered Journal Register’s stock price to the point it was forced out of the New York Stock Exchange, choking off any realistic hope of raising money by issuing stock. And in mid-May, Journal Register warned that it would “probably” be in default of its loan covenant by the end of July.

Journal Register has hired financial advisors Lazard Fr?res to explore its options. One of them, some analysts project, is bankruptcy.

Tribune Co.
“Tribune Co. put a very significant amount of debt on their balance sheet at a time when their cash flows were deteriorating badly, and they’ve been in the crosshairs of what’s going on more broadly in the newspaper industry because they are in big markets,” says Fitch Ratings analyst Mike Simonton.

When Tribune Chairman and CEO Sam Zell engineered the $8.1 billion deal to take the Chicago newspaper publisher and broadcaster private, he said he intended to keep all its businesses except the Chicago Cubs and its landmark Wrigley Field. But with interest bills of $1 billion and a balloon payment of $650 million coming due by the end of the year ? on top of double-digit declines in revenue ? he quickly concluded that some assets would have to go.

The sale of Newsday gives Tribune some breathing room ? and is apparently allowing it to toughen its negotiating stand with potential buyers of the Cubs and/or Wrigley Field. But some analysts and investors are skeptical of the long-term prospects of a company loaded with $13 billion in debt.

One way to measure that skepticism is by looking at so-called credit default swaps, essentially insurance against a company reneging on its debt. In mid-May, the swaps sellers were asking $6 million up front to insure $10 million in Tribune bonds.

“Is Tribune trading at distressed levels? Certainly,” says David Novosel, a Chicago-based analyst for Gimme Credit, a firm that researches corporate bonds. “How dire is the situation? I would say it is not on the verge of bankruptcy, because I think the assets sales will get them over the hump near-term. Can I see them going on the verge in mid-2009? I would say yes.”

Zell sees a far more optimistic picture, telling lenders in a conference call in the spring that the radical changes in corporate culture his team is bringing will pay off in top-line revenue growth. The debt load is not daunting, he insists. “From where we sit now, it does not appear we will have difficulty meeting our obligations going forward,” Zell added.

The McClatchy Co.
McClatchy for years was a Wall Street favorite, and even now, with its stock collapsed more than 70% in the past year, there is among analysts a real reservoir of goodwill for The Sacramento Bee and The Miami Herald’s parent company.

For instance, even as Moody’s Investors Services was nudging McClatchy’s corporate debt rating to the edge of junk bond territory, and warning that it likely would downgrade its credit further, the ratings firm had kind words for the publisher.

“Good reader demographics and the depth and quality of reporting in local markets drive demand from advertisers, which along with the company’s strong cost management deliver above- average industry margins that support the cash flow,” wrote senior analyst John E. Puchalla and Corporate Finance Group Managing Director Alexandra S. Parker.

McClatchy’s biggest problem stems from its biggest deal, the $4.5 billion acquisition of Knight Ridder in 2006. After taking $3 billion in non-cash goodwill impairment charges related mostly to those papers in 2007, the deal looks considerably less valuable ? but $2.5 billion in debt is not going away. McClatchy’s financial situation is also complicated by the fact that more than a third of its total revenue comes from its newspapers in Florida and California, which have been particularly hard hit by the advertising fall-off from the housing collapse.

But if any company has a shot of emerging in good shape from the debt crisis, it’s McClatchy, analysts say. “McClatchy management is well aware of the situation they are in, and they are committed to bringing debt down to a manageable level,” says Benchmark Capital Managing Director Edward Atorino.

GateHouse Media Inc.
If there’s a poster boy for the newspaper debt crisis, it’s GateHouse Media, some analysts say.

“It’s an example of a company whose organic revenue is flat to declining, and has an above-average debt ratio and a lofty dividend,” says Tom Corbett, an equity analyst with Morningstar. The firm was always skeptical of GateHouse’s model of growing cash flow through acquisition and stock price by paying out a well-above-average dividend. To fuel its growth, GateHouse borrowed at a rapid pace, raising its debt 115% in 2007 to $1.2 billion from $560 million.

Unfortunately for GateHouse, its revenues fell on a same-store basis ? and so did cash flow. It has cut its dividend, and signaled it will soon be selling some real estate holdings. GateHouse CEO Michael E. Reed notes, though, that the chain’s revenue dip of 4.2% in the first quarter was better than the double-digit drops other companies reported. “Longer term, I am confident we will see a turnaround in advertising spend,” Reed told analysts on a recent conference call.

Media economist Robert Picard isn’t so sure. “It’s in pretty bad trouble, and it’s going to have to do something pretty soon,” he says.

Gannett Co. Inc.
Gannett is on the other end of the debt spectrum, with an estimated debt-to-EBITDA ratio of about 2 times to 2.2 times, according to Morningstar ? which calculates that the average ratio for publicly traded newspaper companies is 4.4 times.”That’s very low, very solid,” says Benchmark Capital’s Atorino. Gannett was doing so well, in fact, that he once urged the USA Today publisher to increase its dividend.

At Gannett’s annual meeting this spring, CEO Craig Dubow noted that Gannett had increased dividends by 29% during the year ? but also kept free cash flow available for strategic acquisitions. “Our balance sheet is, I believe, the best in our industry,” he told shareholders. “This will give us flexibility and firepower going forward. We also must maintain our ability to leverage our position, despite what is happening in the credit markets.”

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