Moody?s Upgrades Gannett Liquidity Rating on ?Meaningfully Improved? Balance Sheet

By: Mark Fitzgerald

Moody’s Investors Service late Thursday upgraded Gannett Co.’s speculative-grade liquidity rating, citing its reduced debt, cost-cutting and stabilizing revenue.

Moody’s Senior Credit Officer John Puchalla said the upgrade reflects Gannett’s “meaningfully improved current and projected headroom within the financial maintenance covenants in its credit facilities driven by debt reduction from free cash flow, significant cost reductions, and greater revenue stability.

Gannett’s overall “corporate family rating” remains at Ba1, which is Moody’s highest speculative-grade or junk rating. Moody’s also noted that it is keeping a “negative” rating outlook on the company, which means its debt could be downgraded over the medium term.

But Moody’s latest speculative-grade liquidity, or SGL, rating is a considerable upgrade, moving from SGL-3, which the credit rating agency refers to as “adequate” to SGL-2, defined as “good.”

“Gannett’s SGL-2 speculative-grade liquidity rating reflects Moody’s expectation that Gannett will meet its $663 million of 2011 maturities with existing cash, projected free cash flow and undrawn capacity on the $2.75 billion revolvers (approximately $1.8 billion available as of 6/27/10) and that it will maintain a meaningful covenant cushion (greater than 30%),” Puchalla wrote. “However, the SGL rating could be lowered to SGL-4 if the March/April 2012 maturities are not proactively addressed within 12-15 months of maturity.”

SGL-4 is defined as “weak” liquidity by Moody’s.

“Gannett is aggressively managing its cost structure including sizable reductions in the production and distribution costs of its publishing operations,” Puchalla wrote in the note to investors. “Moderation of the severe cyclical downward pressure affecting advertising revenue and debt reduction funded from free cash flow are also contributing to improving credit metrics. Moody’s believes Gannett’s debt-to-EBITDA (approximately 2.8x LTM 6/27/10 [last 12 months from June 27] incorporating
Moody’s standard adjustments) and free cash flow-to-debt (23.4% LTM 6/27/10 incorporating Moody’s standard adjustments) are in line with the levels anticipated in the Ba1” corporate family rating.

Moody’s said it is keeping the negative rating outlook primarily because of refinancing risk on a revolver and senior note that mature in 2012.

“Moody’s expects that Gannett will seek to chip away at its maturities in the near term. However, volatile investor sentiment toward newspaper issuers creates refinancing risk until transactions are completed to reduce maturities to levels that can be serviced with free cash flow and committed revolver capacity,” Puchalla wrote.

Moody’s also warned that the refinancing of some $433 million in notes coming due next year could affect its investment-grade rating on some guaranteed debt.

Moody’s rating action is the second upugrade for a newspaper company in the past week. Friday, Standard & Poor’s Ratings Services upgraded The New York Times Co.’s corporate credit rating to B+ from B. Both are speculative-grade, or  junk, ratings.

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