By: Mark Fitzgerald
GateHouse Media, which took on heavy debt to fund a newspaper buying binge just as the industry was about to tumble into its worst-ever recession, received something Tuesday that would have seemed extremely unlikely just last year: a ratings upgrade from Moody’s Investors Service.
Moody’s upgraded GateHouse’s “probability of default rating” (PDR) to Caa3 from Ca. It is not exactly a ringing endorsement: The previous rating of Ca suggested a 100% probability of default within a four-year period. The new rating of Caa3 suggests about a 73% probability.
And Moody’s did not change its “corporate family rating” (CFR) of the parent of the Peoria (Ill.) Journal Star, The Patriot Ledger and 87 other dailies and hundreds of weeklies and shoppers. Under Moody’s definition, GateHouse’s CFR of Ca, which is just one notch above its lowest rating, suggests an investment in its debt is “highly speculative.”
In an note to investors, senior analyst Carl Salas also said Moody’s expects GateHouse to default on its $1.2 billion term loan “over the intermediate horizon” – and raised the spectre of a bankruptcy filing.
Moody’s said recent declines in EBITDA at GateHouse have pushed its debt-to-EBITDA ratio above an 11 times multiple for the 12 months ended June 30. Like its newspaper publishing peers, GateHouse has been able to maintain and even improve its EBITDA margins through cost-cutting.
“Nonetheless, we consider that management may conclude that more fundamental measures, including a distressed exchange
or pre-packaged bankruptcy filing, may represent the optimal solution to provide longer term liquidity relief while addressing the company’s untenable capital structure,” Salas wrote. “If this does not occur, given the high debt load, it is unlikely that the company will possess the ability to refinance its debt at maturity in 2014.
So why is GateHouse getting an upgrade, and why has its rating outlook been upgraded to stable from “negative,” which had suggested a downgrade was likely?
Moody’s said GateHouse has no financial covenants to violate in its bank term loans unless it borrows from its revolver – which is impossible because of its high debt. GateHouse is unlikely to default on the loan facilities over the next 12 months, Moody’s concluded.
“The stable outlook reflects Moody’s view that, despite single digit
declines in revenue growth, GateHouse should be able to generate
sufficient EBITDA to fund working capital, interest expense and capital spending over the next 12-18 months thereby avoiding payment default,” Salas wrote.