Top Chains Upbeat on Debt: Unjustified?

By: Mark Fitzgerald One year ago, during the credit freeze that followed the meltdown of the financial markets, some newspaper companies that had been very comfortable with their debt loads suddenly found themselves perilously close to default. Others could not avoid the fall. By mid-2009, at least 10 companies tumbled into bankruptcy. Refinancing and paying off debt, extending the time they have to make major payments, and lowering debt- to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratios, became all-consuming goals.

Near the end of this year, newspapers were sounding remarkably upbeat about their debt, even as ad revenue continued to fall by unprecedented year-over- year percentages of 20% or more. As executives reviewed their third-quarter performances with analysts on conference calls into November, they uniformly noted that they had paid off some debt through asset sales and dividend cuts, and their debt-to-EBITDA ratios were now comfortably below the so-called "leverage covenants" of their credit and loan agreements.

Gannett Co., for instance, noted that it had reduced its debt by nearly $200 million in the third quarter this year, and more than $500 million through the first nine months of 2009. Chairman and CEO Craig Dubow said its offering of $500 million in bonds, which stretched out the maturities of its debt, "was very well-received," which "says a lot about the confidence investors have in the future of the Gannett Company."

The McClatchy Co. noted that it had shrunk its debt, and had no big payments coming until mid-2011. It was "well within" the allowable leverage ratio of seven times debt to EBITDA, CFO Pat Talamantes told analysts, adding, "One thing investors should keep in mind is that leverage has been very well-behaved, and going down."

But the Wall Street firms that rate the creditworthiness of corporations are not all that impressed with the news-paper industry's debt situation. Mike Simonton, senior director of media and entertainment for Fitch Ratings, sums up his assessment of newspaper debt this way: "It may not be raining right now, but the storm has not passed."

Fitch and other credit rating agencies are skeptical about the ability of newspaper companies to compete with other industries as more money is freed up for refinancing debt or buying newspapers' high-yield debt. Nearly every publicly traded newspaper company had a credit rating in "junk" territory.

John E. Puchalla, Moody's Investors Service vice president and senior analyst, says newspapers are grouped with "sectors such as auto parts or other industries that are really out of favor with the investor community." The continued decline in advertising revenue may be slowing, credit raters are saying, but until newspapers show that they can again increase revenue year-over-year they will be at a big disadvantage trying in the fight for capital.

"Even if the appetite is there for investing in high-yield debt, it's not clear how much appetite there will be for newspapers' high-yield debt," Simonton says.

And make no mistake, newspapers will have to go to the market to refinance debt, the credit agencies say, because they are not generating enough free cash flow to pay off the debt internally. With the pressure for big interest or principal payments off for now, the big newspaper companies have a year or two to make themselves more attractive to lenders, the agencies say. But clearly, that will not be easy.

Moody's Puchalla, for instance, says the five to seven-times leverage ratios that newspapers are carrying now simply won't cut it when they go to market for credit: "We think the industry has got to be really low-leveraged. The right target is probably zero debt, which may be impractical." Ratios of two to three times debt to EBITDA might be doable, but probably not anything higher, he adds. Moody's thinks Gannett will "have refinancing hurdles," but likely will be able to pull it off.

The New York Times Co., with its long maturities, will probably clear refinancing obstacles as well, it says. McClatchy, which is often applauded by credit raters for its diligence in paying down debt, is likely to be the most challenged, Moody's says.

Puchalla stops his list of newspaper publishers there. "Most of the rest of the industry," he adds, "is already in default."