Fitch Downgrades Tribune Co. Debt On Tax Liability

By: E&P Staff Fitch Ratings said Friday it had downgraded Tribune Co.'s issuer default rating to 'A-minus' from 'A,' and given a "negative" ratings outlook because it expects the media giant's debt to be higher than historical levels through next year as a result of its nearly $1 billion tax liability.

On Sept. 28, a Tax Court judge ruled that Tribune owed tax on a 1998 transaction between the old Times Mirror Co., which Tribune acquired in 2000, and Reed-Elsevier, which acquired the Matthew Binder legal publishing company.

Tribune has said it intends to finance the cash payment with commercial paper borrowings.

"While Fitch believes the company's capacity to generate free cash flow (FCF) is strong with $800 million and $690 million generated in 2003 and 2004 (after approximately $160 million in common dividends), given the company's depressed share price, Fitch believes that meaningful FCF will be dedicated toward share repurchases and acquisitions for the remainder of 2005 and, in 2006, balanced against reducing absolute debt levels," Fitch said.

Fitch said that while it believes Tribune will use some of its cash flow to repay debt, "it is not anticipated to be sufficient to restore the capital structure to pretax ruling levels."

"A-minus" is the seventh-highest investment-grade rating. A negative outlook means a rating downgrade is likely to follow in the next year or two.

"The Negative Outlook reflects the pressure the company faces to enact shareholder friendly initiatives (predominantly in the form of share repurchases and enhancing common dividends) to boost the historically low stock price, given the company's limited growth prospects," Fitch said. "Succumbing to such pressure would likely come at the expense of debt reduction and could pressure the ratings further."

It said the negative outlook also takes into consideration an expectation of circulation and advertising declines. "To offset this pressure, Fitch believes Tribune could become more aggressive in its acquisition strategy," the company added.