Delay Of Game: Tribune Credit Rating Sinks On Shaky Cubs Sale

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By: Mark Fitzgerald

Delaying the sale of the Chicago Cubs baseball team cost Tribune Co. its semi-respectable junk bond credit rating Tuesday.

After markets closed, Standard & Poor’s Ratings Services downgraded its corporate credit rating to CCC from B-. Under S&P’s system, the speculative-grade rating suggests that unless economic conditions turn favorable soon — unlikely for the newspaper business — Tribune is “not likely to have the capacity to meet its financial commitment on the obligation.”

S&P assigned a “recovery rate” rating of 4, suggesting debt-holders can expect to get 30 cents to 50 on the dollar in the event of a payment default.

Credit analyst Emile Courtney said the downgrade reflects concern that Tribune won’t get the $1 billion it once expected for the Cubs, its landmark Wrigley Field and its 25% stake in a Chicago sports cable TV channel. “We now believe that proceeds could be significantly below this amount and that the company will not likely receive them this year,” Courtney wrote in a report.

Tribune has said it is going ahead with the sale despite the credit crunch and economic meltdown.

Tribune’s flagship Chicago Tribune reported Tuesday in an article by Ameet Sachdev that the company has given bidders a deadline of before Thanksgiving Day to submit a new offer with details on how the deal would be financed.

S&P is also concerned about Tribune’s accelerated fall-off in revenue and cash flow, she said. Third-quarter revenue fell 11%, and EBITDA (earnings before interest, taxes, depreciation, and amortization) plunged 42%.

S&P paints a gloomy picture of Tribune’s next few months. It said it expected EBITDA to fall 10% in the last quarter of 2008 — and another 30% through next year.

If that happens, S&P warned, Tribune could be in violation of its loan covenants that limit the debt-to-EBITDA ratio to 9 times for the last quarter of this year, and 8.75 time for the first quarter of 2009. This technical default would likely result in loan amendments with more onerous terms, increasing the cost of borrowing while at the same time tightening access to funds.

Tribune reported Monday that its long-term debt stood at $11.8 billion. About $8 billion was taken on to swing last December’s going-private deal.

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