Fitch Downgrades Belo Debt to 'Junk'

By: E&P Staff Credit rater Fitch Ratings sounded a note of dissent on Belo Corp.'s plan to spin off its newspaper business, downgrading The Dallas Morning News publisher's debt to "junk" level Monday.

New York City-based Fitch also put Belo on a ratings watch of "negative," indicating it could cut its debt rating another notch soon.

Under the plan, Belo will become a pure-play, publicly traded television station operator -- and its newspaper business, renamed A.H. Belo Corp., would be spun off in a tax-free transaction to shareholders, also as a publicly traded company.

Belo said debt of the newspaper business would be allocated to the television company.

Fitch said the proposed split would strip about one-third of cash flow from the remaining TV operator, "resulting in weakened credit metrics for existing bondholder," with leverage about 4.5 to 5 times revenue.

"In addition to heightened financial risk, Fitch views this move as a material change in Belo's financial policies and an indication of increased financial risk appetite on the part of Belo's key voting shareholders," Fitch said. "Belo's former track record with conservative financial policies and Fitch's previous comfort with Belo's risk appetite had been favorable considerations in its prior 'BBB-' ratings."

Fitch downgraded Belo's issuer default rating on long-term debt to "BB+," its highest junk level grading, from "BBB-," its lowest investment-grade level. It downgraded senior unsecured debt, and Belo's bank facility in identical ways.

In its note, Fitch said the spin-off is probably not a bad idea, ridding it of a newspaper division that is "the more secularly challenged business in Fitch's view."

"However, the elimination of those cash flows, synergies, and revenue diversification result in a weakened credit profile," Fitch added.

A little more than an hour before the end of the trading day, Belo (NYSE:BLC) shares were trading up 16%, or $2.78, at $20.15. Belo shares have traded in a 52-week range of $15.61 to $22.94.