Fitch Ratings On Newspapers In 2007: Prognosis Negative

By: E&P Staff Newspapers and other "traditional media" face fundamental problems as their audiences drift towards new media and their stakeholders demand better returns on investments -- factors that are likely to continue pressuring their debt ratings downward in 2007, the big ratings agency Fitch Ratings said Thursday.

"The outlook for the traditional media segments continues to be negative for 2007," New York City-based Fitch said in its outlook on U.S. media and entertainment companies.

"Newspapers, radio and television broadcasters will continue to be the most pressured due to operational issues associated with their business models which have on average 70%-90% of revenues coming from traditional advertising," Fitch said.

If this shift continues to depress share prices -- as it has for the past few years -- Fitch predicts newspaper and other traditional media companies "will continue to be enticed to reevaluate strategic options." Given the recent troubles at high profile companies with public commitments to investment grade ratings, such as Tribune Co. and Clear Channel, the ratings agency added, "increased skepticism for bondholder protection is crucial."

These "aggressive shareholder friendly actions," such as higher or special dividends and increased stock buybacks, "will continue to be the major risk for bondholders," Fitch said.

"Public commitment to investment grade ratings needs to be treated with a level of skepticism especially in light of specific examples of Tribune and Clear Channel, which had sold bonds to the market at investment grade levels and publicly stated their commitments to operate at investment grade levels only to subsequently commence reviews of strategic alternatives to the detriment of bondholders shortly thereafter," Fitch said.

Media companies of all stripes, Fitch said, are tending to use their free cash flow for acquisitions and stock buybacks -- but not so much for debt repayment.

"The generally depressed equity prices most significantly for the newspaper, TV and radio broadcasting companies, broader secular issues, and shareholder activism led many management teams in 2006 to re-evaluate their capital structure strategies and commitments to debt ratings, resulting in numerous rating downgrades," the agency said. "Fitch believes these themes will continue to play out in 2007."