Financial Crisis: Is There Life After Debt?

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By: Mark Fitzgerald And Jennifer Saba

Given that debt is the central problem for newspaper companies with the most well-publicized woes, the credit freeze that stunned markets this fall could be particularly painful if it lingers too long. “Most news-paper companies are in for a very bumpy ride because their balance sheets were in such poor condition prior to the development of this financial crisis,” warns media economist Robert Picard.

Already, lenders are putting heat on some of the biggest debters in the industry ? and the pressure is only going to grow, financial experts predict.

In recent weeks, lenders have renegotiated agreements with companies including The McClatchy Co., Journal Register Co., and Morris Communications. In all cases, they’ve set higher interest rates and fees, reduced available credit, and required proceeds from any asset sale to go to paying down debt.

Under the terms of Morris’ renegotiated credit line, the Augusta, Ga.-based chain is required to “consummate a transaction, or at least sign a letter of intent to do so, that would generate sufficient funds to be able to prepay all loans” under the credit agreement. Morris, which last year sold off 14 dailies in part to pay down debt, has until next March 31 to sell something or buy out its lenders.

Lenders will be increasingly tough negotiators, bond analyst Mike Simonton of Fitch Ratings tells E&P. “Secured lenders are expected to be in a very strong negotiating position,” he says ? and they will increasingly exercise more influence on newspapers’ operations and portfolios.

But that can be an uncertain balancing act for creditors, too, notes John Puchalla, a vice president and senior analyst at Moody’s Investors Service. “One thing that is always tricky to manage if you force a company to sell assets may be doing it at a time when the asset sales are weakest,” he says. “How far they are willing to push it and how tight the reins of credit are, depends on the market, and the leverage they [have].”

For many newspaper companies, that’s as good as the news gets when it comes to loans, because they will likely find themselves shut out of reasonably priced credit for some time. With the rest of the country at last joining the newspaper industry in a recession, the prospects of papers generating enough cash to meet its own financing needs gets dimmer.

“Really, the credit crunch is a twin whammy ? it’s magnifying earnings pressure, and it’s making it difficult to raise capital,” Puchalla says. There’s been a “flight to quality” among lenders, adds Fitch’s Simonton, and a “flight away from struggling industries like newspapers.”

Even well-regarded newspaper companies are likely to have financing difficulties ? as demonstrated by Gannett, which drew down $1.2 billion on its borrowing facilities in the first days of the credit crisis when the commercial paper markets locked up. Gannett, with its investment-grade credit rating, normally raises short-term funds with commercial paper. The company said it would use the new borrowings to repay commercial paper.

In the short term, however, newspapers, even the most indebted, are sitting fairly comfortably. Consider McClatchy Co., whose stock and debt ratings have been hammered over concern about its debt load. The parent of The Miami Herald, The Sacramento Bee, and many other papers renegotiated its credit facility just days before the early October crash of stock and credit markets. It was forced to pay higher interest and put up more collateral, and it caught more flak from ratings firms. But the timing was fortuitous, notes McClatchy CFO/Vice President of Finance Patrick J. Talamantes.

“As a result of that, we aren’t seeing any issue from the current crisis,” he says. “We got it done right in the middle of everything, and we were very thankful to get it done when we did.”

And at newspaper companies with relatively light debt loads, such as the newly spun-off E.W. Scripps Co., the freeze in credit markets has been mostly a non-event. In fact, last June Scripps approached Moody’s, S&P, and the other credit ratings and asked to be withdrawn from coverage since the company is not interested in access to the public market right now.

“We knew our needs would be relatively modest,” says Senior Vice President and CFO Tim Stautberg. About the only real effect from the crisis was the spike in Libor, the London Interbank Offered Rate, that is used to set the interest rate when Scripps draws from its credit facility. Within the past several weeks, Stautberg adds, the company hasn’t needed to borrow.

Bank financing of newspaper acquisitions just before the crisis was already difficult, but possible, says John Cribb, whose Cribb, Greene & Associates handles small and mid-sized papers. “We had a hell of a time getting some of our deals closed,” Cribb says. “But in our market segment, newspapers can still borrow money. Credit’s not as easy, and the terms are not as good, but a lot of our people kept their powder dry and have good relations with their banks.”

Until the October crisis, 2008 was one of the busiest ever for Cribb’s brokerage firm. What’s ahead, though, remained unclear to him a couple weeks into the freeze.

But another broker, Kevin Kamen of Kamen & Co. Group Services, thinks he knows what’s ahead ? nothing but trouble. While he’s still shopping some newspaper and magazine properties, activity has slowed dramatically.

“You’re going to see closings,” he says. “Looking at the P&L [profit and loss] statements that I see every day ? everybody is struggling. When money dries up, it doesn’t matter how great your newspaper is if you can’t pay the bills.”

In passing ? and without naming names ? Kamen mentions someone who symbolizes the industry’s distress: a newspaper publisher whose house is in foreclosure.

“It’s fair to say in a capital-constrained lending environment like this, typically the weakest players are the ones who get hurt, and newspapers are in the weaker categories,” adds bond analyst Simonton. “The situation is pretty poor for newspapers now, but there’s no reason to believe it couldn’t get worse.”

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