Philadelphia Papers Miss an Interest Payment, Again

By: The owners of Philadelphia's two major daily newspapers missed an interest payment once again as they seek a new agreement with lenders to account for the continuing decline they expect in advertising revenue.

The latest move appears aimed at forcing lenders to renegotiate, something many have been doing with newspaper companies as the worsening economy puts additional pressure on an advertising market that ? long before the current downturn began ? already was suffering from a migration of readers and ad dollars to the Internet.

Philadelphia Media Holdings LLC, which owns The Philadelphia Inquirer and the Philadelphia Daily News, said it had enough cash on hand to make its Oct. 1 payment, but was awaiting completion of the renegotiations to release the money.

Although the company made a reference to "the chaos, volatility and uncertainty in today's financial and credit markets" of recent weeks, the newspapers' troubles began long before that.

The company first missed a payment in June, and in August it proposed restructuring its lending agreements to help it weather the drop in advertising revenue.

Philadelphia Media's missed payment of an unspecified amount, disclosed in a statement Friday, follows a decision by the Star Tribune of Minneapolis to skip a $9 million quarterly debt payment to save cash as it, too, tries to restructure its debt.

In both cases, the owners took on debt to buy the papers from McClatchy Co., which itself restructured its lending agreements last month. A group of investors led by former advertising executive Brian Tierney bought the two Philadelphia papers for $562 million in June 2006; Avista Capital Partners acquired the Star Tribune for $530 million in March 2007.

"Both of those went to companies that bought what they thought were undervalued properties at a low time in the market and found out they had bought too early," Ken Doctor, a media analyst with Outsell Inc., said Monday. He said advertising revenue has declined faster than anticipated all year.

Meanwhile, Gannett Co. said Friday that it drew down $1.2 billion from existing credit agreements last Tuesday, bringing the total it owes under those agreements to $1.9 billion. That was done to ensure that the tightening in the commercial paper market for short-term loans doesn't disrupt its day-to-day operations.

An analyst said Monday that Gannett still looked relatively healthy. The company has said it still had "significant untapped availability" under those credit agreements, which allow Gannett to borrow up to $3.9 billion.

"Gannett is a much better capitalized entity than a number of its newspaper peers," said Mike Simonton, media analyst at Fitch Ratings, which analyzes corporate debt. "Although they have significant short-term debt obligation and less liquidity than they did going into the summer, they still have enough financial flexibility to weather dislocations in the credit markets."

Philadelphia Media has less flexibility than large chains to shave costs, Simonton said.

The company missed its June 1 interest payment because it didn't maintain the debt-to-cash flow ratio ? which can happen when cash flow shrinks ? its senior lenders required.

As a result, senior lenders blocked the company's interest payments on $85 million in junior loans held by another group of lenders. The block can last up to six months as senior lenders try to preserve the company's cash for repayment of their loans.

Over the past six months, Philadelphia Media has been in talks with its lenders to relax some of those requirements. In mid-August, it submitted a plan that would give the company $20 million in additional cash from its investors and use proceeds from a planned sale of its headquarters building in Philadelphia to pay down its debt.

Doctor said newspaper companies are now more concerned about completing long-term refinancing than making individual payments.