By: Mark Fitzgerald
The McClatchy Co.’s slowing revenue declines, tight cost controls and debt repayment have “exceeded expectations,” one of the nations big three credit ratings firm says in a new report on the media and entertainment sector.
Fitch Ratings has no so-called “outlook” on McClatchy that would signal a possible change in its credit rating, which it puts at CCC, a speculative-grade or “junk” rating that suggests a “high default risk.”
However, the report says in its “key ratings drivers” section that “A moderation of revenue declines into the low single-digits, coupled with continued tight cost controls, could result in an upgrade into the single ‘B’ rating category.” In Fitch’s definitions, a B rating is “highly speculative.”
The report notes that The Miami Herald and Sacramento Bee parent has repaid about $3 billion in debt since buying the old Knight Ridder chain in 2006. McClatchy, it adds, “has demonstrated impressive cost discipline in the face of relentless revenue declines.” The ratings agency notes that recent revenue declines have “decelerated materially.”
Fitch said it believes McClatchy can cover interest and principal payments for debt maturing through 2014.
“However, Fitch does not expect McClatchy to generate enough free cash flow to pay off its debt maturities in 2017,” the report says. “Given the secular risk for the industry, Fitch’s concerns that online revenue is not growing at a pace to offset the print revenue declines, and with no clear visibility of when revenues will turn positive, Fitch continues to remain cautious of McClatchy’s ability to refinance its 2017 maturities, and over the long term, the company’s capital
structure could still be untenable.”
McClatchy is the only newspaper company included in the 270-page report, “Credit Encyclo-Media Volume III” by the lead analysts of Fitch’s Media & Entertainment, Mike Simonton, Melissa Link-Cohen and Rolando Larrondo.
But the report leaves no doubt that Fitch is skeptical about the newspaper industry’s prospects: “While Fitch believes the worst of the advertising downturn has passed, newspapers are likely to be left behind in an ad recovery. Fitch expects the evolution of advertiser behavior and consumer media consumption habits will provide an overhang to operations for the foreseeable future.”
The full report can be downloaded from the Fitch site here.