Fitch Drives McClatchy Debt Deeper Into Junk Territory

By: Mark Fitzgerald Fitch Ratings downgraded The McClatchy Co.'s overall debt rating further into junk bond territory on worries about its lagging cash flow, and warned that further downgrades may be in the offing.

Fitch moved McClatchy's issuer default rating (IDR) to "BB" from "BB+," and its senior unsecured credit facility and senior unsecured term loan to "BB+," a speculative grade, from "BBB-," its lowest investment-grade rating.

The ratings service also said the company's outlook is negative, meaning a further downgrade is possible. About $2.47 billion in debt is affected by the downgrades.

"Fitch has been negative on the prospects for the newspaper industry for several years," analyst Mike Simonton wrote. "Within the universe of newspaper publishers, we have been less concerned with MNI (McClatchy's stock symbol) than several of its peers. In Fitch's view, MNI is a strong operator with consistently stated public financial policy commitments. Fitch notes that operating weakness to date has largely stemmed from elements of the company's business that Fitch understood were highly volatile; particularly classified advertising (and specifically California and Florida real estate classifieds). This weakness has been pronounced on the top-line and EBITDA and free cashflow pressure has hindered the company's ability to deleverage the balance sheet to levels that Fitch had previously expected."

McClatchy's top-line revenue shrank at an accelerating pace during 2007, Fitch said, and its online "growth decelerated meaningfully."

"Fitch does not believe the negative trends are entirely cyclical and we believe that an economic downturn would layer incremental stress on advertising revenue," it said.

But Fitch also said McClatchy has met or exceeded the ratings firm's expectations on local ad performance, containing costs, and paying down debt with free cash flow.

At the same time, it cautioned that McClatchy will run out of opportunities to reduce costs by outsourcing, consolidating back-office functions, and other means.

And while Fitch said it is "still generally comfortable" with McClatchy's efforts to reduce debt, "significant debt repayment to date has not meaningfully reduced post-asset sale pro-forma leverage from the time of the Knight-Ridder Inc. transaction in mid-2006." It noted that management intends to repay a significant amount of debt in 2008, using $200 million from tax proceeds, $115 in land sales, $40 million from the sale of SP Newsprint, and approximately $150 million from free cashflow.