Fitch To Tribune: Sell, Zell, Sell

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By: Mark Fitzgerald

Tribune Co. Chairman Sam Zell’s new senior management team and cost-cutting measures are unlikely to outrace deteriorating revenue, making the sale of assets like the Chicago Cubs — and perhaps The Los Angeles Times and Newsday — all the more critical, Fitch Ratings Service said in a report issued Tuesday.

Fitch kept its Issuer Default Rating (IDR) unchanged in junk territory at “B-,” and kept its “Negative Outlook.”

“Fitch notes that EBITDA (earnings before interest, taxes, depreciation, and amortization) deterioration combined with limited debt repayment has exhausted much of the room within the rating,” wrote analysts Mike Simonton and Jamie Rizzo.

The report follows Tribune’s release of weak first-quarter results. Publishing revenue fell 7%, and operating cashflow plummeted 30%, Fitch noted.

Tribune (NYSE: TRB) “management has taken steps that Fitch believes may bode well for the longer term health of the company by bringing in new leadership, communicating directly with the staff and experimenting with new revenue streams,” the analysts wrote. “Cost cuts announced and implemented in the first quarter should help somewhat, but Fitch notes that more action may be necessary to offset the rapid erosion of circulation and advertiser dollars.”

Tribune took on $8.2 billion in debt to swing the going-private deal engineered by Chicago real estate mogul Zell and completed in December.

Fitch notes, in particular, that some $650 million of its term loan facility comes due at the end of the year, with another $750 million coming due in mid-2009.

“Fitch expects these payments could be satisfied with asset sales, including the sale of the Chicago Cubs franchise and TRB’s 25% stake in Comcast SportsNet Chicago,” the report said.

The ratings service also suggested that sales of The Los Angeles Times, Newsday, and other valuable assets could be sold. “Cash proceeds from core divestitures would not likely de-leverage the company but could provide some capacity to enhance liquidity,” Fitch said.

Tribune has benefited from the drop in interest rates, but may still have trouble meeting the terms of its senior secured debt, the ratings service warned.

“If trends from the fourth quarter 2007 continue or accelerate in the first half of the year (absent additional cost or debt repayment actions), the company could be at risk of breaching the covenant threshold,” Fitch wrote, adding that covenant requirements will tighten further in the first quarter of next year.

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