By: Mark Fitzgerald
Moody’s Investors Service downgraded The McClatchy Co.’s corporate debt, saying it doesn’t believe the nation’s third-largest newspaper company’s aggressive cost-cutting and loan repayments will be enough to overcome a punishing advertising environment.
Moody’s lowered its so-called Corporate Family rating (CFR) and Probability of Default Rating to Ba3 from Ba2. The rating is slightly above junk bond territory.
Some $2.8 billion in debt is affected by the rating.
Moody’s also downgraded McClatchy’s rating outlook to negative from “rating under review,” meaning a further downgrade is likely.
“The negative rating outlook reflects the uncertainty over the extent and duration of the current cyclical slowdown and ultimate recovery in McClatchy’s local markets and the resulting effect on the company’s ability to maintain a comfortable covenant and liquidity cushion,” Moody’s said.
Moody’s said the outlook for McClatchy revenue for the rest of 2008 has worsened, and the advertising downturn “is likely to be steeper and more prolonged than anticipated at the time of Moody’s rating action earlier this year.”
The ratings downgrade follows McClatchy’s disclosure last Friday that it had reached a new credit agreement with Bank of America. Moody’s said the new agreement “has improved its liquidity position and financial flexibility.” But it said the harsh ad climate could limit its ability to meet the agreement’s covenant of 5-times debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization).
Moody’s said McClatchy’s debt-to-EBITDA rating for fiscal year 2007 was 4.8 times.
Moody’s suggested McClatchy is doing all it can in a tough environment.
“McClatchy’s Ba3 CFR reflects good cash flow generated from the portfolio of newspapers and online properties,” read the note from Vice President and senior analyst John E. Puchalla and Corporate Finance Group Managing Director Alexandra S. Parker. “Good reader demographics and the depth and quality of reporting in local markets drive demand from advertisers, which along with the company’s strong cost management deliver above average industry margins that support the cash flow. Leverage remains high as a result of the debt used to fund the Knight Ridder acquisition and reductions in EBITDA due to revenue pressure, positioning McClatchy in the Ba rating category.”
Moody’s downgrade came after the close of 4 p.m. EDT trading. McClatchy (NYSE: MNI) ended the day at $11.07, up 37 cents, or 3.74%.