Fitch Cuts Tribune Rating Again — And Warns More Downgrades Coming

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By: E&P Staff

When Tribune Co. announced last month that it was going private in a heavily leveraged deal with Chicago real estate magnate Sam Zell, Fitch Ratings immediately downgraded the media giant’s debt rating, and warned more cuts were likely on the way.

Late Thursday, Fitch followed through, reacting to the first step in the Zell transaction by dropping Tribune’s IDR (issuer default rating) a notch to B+ from BB-, and again warning of a likely downgrade, to B-, when the deal is completed.

B+ is four notches below an investment-grade rating. The effect will be to make borrowing somewhat more expensive for Tribune.

Fitch said the company remained on a Ratings Watch Negative. If the deal is completed as envisioned, it added that would likely change to a Stable Outlook rating.

The $8.2 billion deal will be financed in stages by some $11 billion in debt that will be channeled through an employee stock options plan (ESOP) that will not be taxed on interest or principal payments.

Fitch said its ratings reflect, in part, “the significant debt burden the announced transaction places on the company’s balance sheet while its revenue and cash flow have been declining.”

The ratings firm said it believes “secular” or fundamental changes in the newspaper and broadcast businesses could cause more cash flow volatility. Declining cash flow could cause a crunch, it warned.

Fitch noted, too, that classified advertising “is presently facing both secular and cyclical challenges with revenues down approximately 15% in the first quarter of 2007.”

Fitch rated Tribune’s new senior secured credit facility as BB.

In addition to downgrading the IDR, it also downgraded senior unsecured notes to B+ from BB-.

Fitch cut its rating on subordinated exchangeable debentures to CCC+RR6 from B+. A Fitch Ratings guide says a CCC rating means that “default is a real possibility.”

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