S&P Predicts McClatchy Loan Default by Year's End

By: Mark Fitzgerald Standard & Poor's Ratings Services downgraded The McClatchy Co.'s credit ratings Friday, and warned that it could default on its loan agreements by the end of the year.

Last September, McClatchy won agreement from its lenders to loosen its so-called leverage covenants, allowing it to carry more debt relative to its income. Under terms of the agreement, McClatchy could be forced to repay all its loans immediately if the leverage covenants are breached. The new agreement also pledges essentially all McClatchy newspapers and other assets as security.

But S&P credit analyst Emile Courtney said even with the looser loan terms, McClatchy will have a hard time servicing the loan by the end of the year.

"The rating actions reflect our belief that McClatchy is likely to violate the total leverage covenant in its credit facilities at the end of 2009," Courtney said. "This is due to our view that total revenue could decline near 20% and EBITDA (earnings before interest, taxes, depreciation and amortization) could fall between 35% and 40% this year."

S&P said it is skeptical that McClatchy's lenders will be amenable to renegotiating terms yet again -- which could lead to, in its words, "a restructuring of some form." Tribune Co., with a much higher debt burden than McClatchy, in December filed for Chapter 11 bankruptcy protection while it "restructures."

S&P lowered McClatchy's corporate credit rating to CCC+, a speculative-grade, or junk, level that suggest the loans are "currently vulnerable to nonpayment" and that in adverse economic conditions such as now "the obligor is not likely to have the capacity to meet its financial commitment on the obligation." McClatchy had been rated B, which is also a speculative-grade rating.

S&P also downgraded its so-called recovery rating to 3, suggesting that in the event of a default, creditors can expect a "meaningful recovery" of 50 cents to 70 cents on the dollar. McClatchy had been rated 2 for "substantial recovery," meaning creditors can expect to get 70 cents to 90 cents on the dollar.

More details of the ratings action and its consequences are at E&P's business-oriented blog Fitz & Jen blog