Moody's Downgrades GateHouse, Raises Specter of Bankruptcy

By: Mark Fitzgerald Moody's Investors Service downgraded its credit ratings on GateHouse Media Inc.'s approximately $1.2 billion in debt Thursday, declaring the community publisher's capital structure "unsustainable" -- and raising the possibility that the company may choose bankruptcy protection as payments come due after 2010.

Moody's noted that GateHouse has aggressively cut expenses and has won relief from its lenders. But it said the company is likely to incur losses in free cash flow that will make servicing the debt difficult.

"We consider that management may conclude that more fundamental measures, including a distressed exchange or pre-packaged bankruptcy filing, may represent the optimal solution to provide longer term liquidity relief while addressing the company's untenable capital structure," wrote Moody's senior analyst John Page. A distressed exchange is an offer to buy back debt at far less than the face value.

Under its principal ownership by the private equity firm Fortress Investments Group, GateHouse expanded rapidly by buying newspapers that were supposed to generate more free cash flow that in turn would be used to pay high dividends supporting a high stock price. The industry recession wreaked havoc on that plan. GateHouse has since dropped its dividend, and been delisted from the New York Stock Exchange.

A GateHouse spokesperson did not immediately return a message seeking comment. GateHouse has noted in the past that it has no big debt payments coming up in the near future.

Moody's dropped GateHouse's "corporate family rating" to Ca from Caa1, and its "probability of default" rating to Ca from Caa2. The new ratings on about $1.2 billion of debt are defined as "highly speculative" by Moody's.

The ratings reflect Moody's "view of very high default risk and weakened recovery prospects for debtholders in an event of default scenario which is exacerbated by lingering adverse current market conditions," analyst page wrote.

The full note from Moody's is posted at E&P's business-oriented Fitz & Jen blog.