Credit-Worthy? Fitch Raises Possibility of McClatchy Debt Upgrade

By: Having steadily marked down The McClatchy Co.'s debt to the rock bottom of junk status, Fitch Ratings is now suggesting The Miami Herald parent may be in for a rating upgrade.

In their latest note on McClatchy, Fitch analysts Mike Simonton and Rolando Larrondo raise the prospect of an upgrade if, as they expect, the publisher is successful in refinancing debt coming due in 2011. Though the possible upgrade, signaled by assigning a "Watch Positive" on McClatchy, would still keep the chain's credit rating deep in junk territory, it would no longer suggest that default is imminent.

The Fitch action reflects the first glimmer of good news from credit ratings firms that over the past year hammered down into speculative-grade or junk bond status the creditworthiness of nearly all big newspaper companies -- traditionally stable businesses with plenty of free cash flow and gold-plated credit.

Fitch now rates McClatchy's $2 billion in debt, both secured as unsecured, as "C", its lowest rating above a default rating. Secured debt has a so-called Recovery Rating of 4, suggesting creditors can expect to receive between 31% and 50% of their investment in a default situation. McClatchy's unsecured debt is rated 6, indicating Fitch's expectation that creditors will get nothing in a default.

"If successful in refinancing its 2011 maturities, Fitch could upgrade the IDR (issuer default rating) at least one notch to 'CC,'" the Fitch analysts write. "Depending on the amount of debt issued and the debt instruments that are repaid, the senior secured debt rating would also likely be upgraded to the same level as the IDR, given Fitch's continued expectations for 31%-50% recovery."

According to Fitch's ratings definitions, "A 'CC' rating indicates that default of some kind appears probable."

McClatchy took on large amounts of debt to finance its blockbuster acquisition of the Knight Ridder chain. Fitch notes that McClatchy has been assiduous in paying down debt, and has knocked $3 billion off its debt load since the 2006 transaction. The chain "has demonstrated impressive cost discipline in the face of relentless revenue declines," the analysts write.

"However, Fitch's ratings have reflected Fitch's belief that McClatchy has an untenable capital structure relative to the prospects for its future cash flow generation," they write. On the other hand, they write that with a refinancing that stretches out maturities, the company will be able to handle its debt payments.

The complete Fitch note is posted at E&P's business-oriented Fitz & Jen blog.