Gannett Loses Investment-Grade Rating

By: Mark Fitzgerald Gannett Co. Inc., the nation's largest newspaper publisher, lost its investment-grade credit rating from Moody's Investors Service Thursday.

Gannett had been one of the last publicly traded newspaper companies with an investment-grade rating. The Washington Post Co., with its diversified portfolio of properties including the profitable Kaplan education company, is the only remaining newspaper publisher whose bonds are not rated as "junk."

The rating downgrade will make borrowing more expensive for Gannett, and may shut it out altogether from certain sources of funding.

Moody's downgraded $1.6 billion of Gannett's senior unsecured notes -- that is, debt not secured by collateral but at the head of the line for repayment among unsecured obligations -- to Ba2 from Baa3. The old rating was Moody's barest-minimum investment-grade rating. The new rating is two notches below Moody's top-rated junk.

Moody's acknowledged that its rating downgrade could have the effect of triggering a so-called springing guarantee in Gannett's credit facilities that will require Gannett to guarantee the credit agreements within 15 days of a downgrade to speculative-grade. The senior unsecured debt would then no longer be at the head of the line for repayment.

"The downgrade reflects Moody's expectation that changing media consumption habits and the heightened level of price and volume competition that Gannett faces as it seeks to monetize its strong local-market content positions in its traditional media and newer digital distribution channels will continue to erode operating cash flow," wrote senior analyst John E. Puchalla. "Moody's believes these pressures along with a deep cyclical slowdown in advertising spending and high operating leverage will lead to a weakening of credit metrics to speculative-grade levels for at least the next two years despite revenue-enhancement initiatives and significant cost reductions."

Moody's placed a"stable" outlook on Gannett's debt, suggesting no further downgrade is expected.

More details of the downgrade are posted at E&P's business-oriented Fitz & Jen blog.

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This story has been corrected. It erroneously stated Moody's had placed a "negative" outlook on Gannett.