UPDATE: Responding to McClatchy Debt Swap, Credit-Rater Raises Bankruptcy Specter

By: Mark Fitzgerald Reaffirming its belief that The McClatchy Co. has "an untenable capital structure" of large debt and shrinking revenue, Fitch Ratings on Friday downgraded the credit rating of the nation's third-largest chain, and noted pointedly that other debt-encumbered newspaper companies are now iin bankruptcy protection.

The action came hours after McClatchy announced that its offer to exchange $1.15 billion of its approximately $2 billion debt for new and deeply discounted notes with higher interest rates had fallen far short of its goal.

Fitch dropped its "issuer default rating" from C, which indicates an imminent or inevitable default, to RD, indicating a default on some but not all of McClatchy's debt. In late May when McClatchy announced the debt swap, Fitch and other big credit rating agencies declared that it was a "coerced debt exchange" that punished noteholders by trying to force them to accept less than the full value of their notes.

"Fitch has believed that McClatchy has an untenable capital structure relative to the prospects for its future cash flow generation," credit analyst Mike Simonton wrote in the note. "The ratings reflect Fitch's belief that default is imminent or inevitable. Fitch notes that more than five newspaper groups have filed for bankruptcy protection in the past six-months."

McClatchy had offered to exchange as much as $1.15 billion in debt for deeply discounted new notes that pay far higher yields. It said Friday the offer had closed with holders of old notes with face values totaling $102.9 million accepting the offer.

While the acceptance amounts to just 9% of its goal, McClatchy Treasurer Elaine Lintecum told E&P there was much to like about the outcome.

"We saw the offering as a good opportunity to take advantage of discounts to reduce our debt, and in fact realized a 70% discount and have reduced public bond debt by $75 million in the exchange," she said. "We feel good about the fact that coupled with the retirement of $31 million of the 2009 maturities, we have reduced bond debt by over $100 million in the first half of 2009."

Like many companies weighed down by debt, McClatchy was looking to buy its debt back at a deep discount, in its case paying about 18 cents to 33 cents of face value, depending on when the note came due.

Its original offer was to exchange $1.15 billion in debt for $60 million in cash and $175 million in new notes, which would pay 15.75 interest. The old notes had coupons ranging from 4.625% to 7.15%.

McClatchy said it will end up paying $3.4 million in cash and $24.2 million in new notes.

Noteholders were most reluctant, it appears, to swap debt coming due relatively soon. Of the $170 million in notes coming due in 2011, for instance, holders of just $3.8 million in face value accepted McClatchy?s offer.

Analysts say that indicates the holders have obtained credit default swaps -- essentially insurance -- on the notes, and may be calculating they will do better if the Sacramento-based parent of The Miami Herald goes into default.

Credit ratings agencies, while repeatedly praising McClatchy?s efforts to pay down its debt, have cited the debt load and falling revenue in rating McClatchy debt deep in junk, or non-investment-grade, territory.

For more details and analysis of the McClatchy debt exchange, visit E&P's business-oriented Fitz & Jen blog.