By: Mark Fitzgerald Standard & Poor's Ratings Services downgraded The McClatchy Co.'s corporate credit rating into the near-rock-bottom SD, or "selective default," category, but said that on Tuesday it would raise it to CC, a rating deep in "junk" territory.
S&P's rating decisions, which it said will include a "negative outlook" that signals the possibility of another ratings cut, amount to a poor asssesment of McClatchy's just-completed debt exchange. S&P had said it expected to rate McClatchy slightly higher than CC following the swap.
S&P's action follows McClatchy's announcement that just 9% of holders of more than half of its $2 billion in long-term debt accepted its offer to swap its notes for steeply discounted new notes with far higher interest rates.
"The downgrade of the corporate credit rating to 'SD' reflects our view that the exchange at a significant discount to the par value of the notes is tantamount to a default given the distressed financial condition of the company," wrote analyst Emile Courtney.
S&P also repeated its contention that McClatchy is likely, by the end of this year or early 2010, to violate the covenants of its loan agreements that prohibit it from carrying debt that is more than seven times its EBITDA (earnings before interest, taxes, depreciation and amoritzation).
"In this scenario, we are uncertain that lenders would grant temporary relief -- and even if they did, we believe that potential leverage of 7x (times) or more would not be manageable over the long term given secular trends in the newspaper industry," Courtney wrote.
For more details on the S&P ratings action, go to E&P's business-oriented
Fitz & Jen blog.
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