Fitch Downgrades McClatchy Debt Deeper Into Junk On Revenue Concerns

By: Mark Fitzgerald

After markets closed Thursday, Fitch Ratings downgraded The McClatchy Co.’s Issuer Default Rating (IDR) deeper into junk territory on concerns its top-line revenue and cash flow will continue to decline.

Fitch downgraded McClatchy’s IDR to “B+” from BB. A “B” rating means Fitch believes McClatchy bonds are “highly speculative,” with a “limited margin of safety” remaining.

Fitch also downgraded McClatchy’s senior unsecured notes and debentures to “B/RR5″ from ‘BB,” suggesting that the recovery rates under a “distressed scenario” such as default would be 11% to 30%.

Fitch said its outlook on McClatchy “negative,” suggesting further downgrades are possible.

McClatchy’s debt amounts to about $2.1 billion.

In his note, analyst Mike Simonton said the downgrade and negative outlook “reflect the continued top-line revenue pressure and resulting decline in EBITDA (earnings before interest, taxes, depreciation, and amortization).

Thursday, McClatchy reported its second-quarter advertising revenue was off16.8% from the year-ago quarter on a plunge in classified advertising that included a 39% decrease in revenue from real estate classified and a 37% drop in from the housing category. In a conference call, McClatchy executives said its board would reconsider its dividend policy. Last year, Fitch noted, McClatchy paid out $60 million in dividends.

Fitch said McClatchy cost-cutting efforts — including the announced reduction of 1,400 full-time equivalent employees — have not yet been able to offset declining revenue and EBITDA.

“While still generally comfortable with (McClatchy’s) willingness to repay debt, this weakening of EBITDA and free cash flow has hindered the company’s ability to meaningfully reduce leverage with free cash flow going forward,” Simonton wrote.

Fitch said McClatchy[‘s leverage ratio, measured by debt-to-EBITDA, was 4.2 times if one-time restructuring charges of $23.3 million are not included in EBITDA.

McClatchy’s loan covenants, which were amended last March, limit total debt to 5.0 times through September of next year, when it steps down to 4.75 times for a year.

Shares of McClatchy (NYSE: MNI) closed Thursday at $4.74, down 24 cents, or 4.82%, on the day.

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