McClatchy Makes Deal With Lenders to Avoid Default

By: Newspaper publisher McClatchy Co. said Friday it has renegotiated its agreement with lenders to gain flexibility, winning concessions that help the company avoid a potential default as advertising revenue continued falling.

McClatchy said the amendment to a $1.175 billion debt agreement will change its terms to account for the company's reduced cash flow. In return, McClatchy agreed to put up more collateral and pay higher interest rates.

?It's important for the company to get additional flexibility,? said Mike Simonton, media analyst at Fitch Ratings, which analyzes corporate debt. ?The company had exhausted much of the room it had under its prior covenant package.?

Simonton said McClatchy might have come close to hitting a technical default if it hadn't renegotiated the terms by Sept. 30. Such a default ultimately could have forced the company to sell assets or declare bankruptcy.

Other newspaper companies have been in similar situations this year.

?There are a number of newspaper companies negotiating with their bankers right now,? said Ken Doctor, media analyst for the research firm Outsell Inc.

Simonton said McClatchy's efforts to renegotiate debt started long before the meltdown in the financial services industry over the past few weeks, but ?certainly getting a deal done in this environment had to be a challenge.?

Based in Sacramento, Calif., McClatchy is one of the nation's leading newspaper publishers. It has 30 daily papers, including The Sacramento Bee and The Miami Herald, and about 50 non-daily newspapers.

McClatchy has been working to reduce its total debt to about $2 billion, much of it coming from its 2006 purchase of the Knight Ridder newspaper chain.

But when its cash flow drops faster than its debt, the ratio of a company's debt to its cash ? known as the leverage ratio ? increases, even if the company doesn't borrow more money. Likewise, its interest coverage ratio ? the ratio of cash to its interest payments ? decreases if the cash flow drops relative to its interest payments.

McClatchy's new agreement adds flexibility by increasing the allowable leverage ratio while decreasing what is permitted for interest coverage.

The allowable leverage ratio goes up for two years before reversing, suggesting that the company believes a recovery could take that long.

?Clearly cash flow, which has been reduced this year, is threatened next year,? Doctor said. ?They don't know to what extent but as managers and stewards of that business, they need more flexibility.?

McClatchy's advertising revenue, already falling as readers and advertisers increasingly turn to the Internet, dropped even faster over the past three months as a worsening economy caused retailers, employers and real estate brokers to reduce ad spending. Ad revenue in August was nearly 18 percent lower than in August 2007.

Last week, the company slashed 1,150 jobs because of the advertising woes, its second major round of reductions in three months. McClatchy also decided to cut by half, to 9 cents per share, its quarterly dividend rate, payable Oct. 6 to shareholders as of Friday, giving the company more cash to reduce debt.

Pat Talamantes, the company's chief financial officer, said advertising revenue is being hurt by an economic downturn nationwide ? and the outlook for 2009 makes the new agreement necessary, despite all the cuts the company has made.

?The resulting amendment is a positive development for the company in that it allows us greater flexibility to work through these difficult economic times,? he said in a statement.

Shares in McClatchy rose 50 cents, or 11 percent, in extending trading Friday following the announcement. It closed earlier up 25 cents, or 5.9 percent, at $4.50.