The 'D' Word – Default – Is Being Pointed At Some US Newspaper Groups As Print Advertising Revenues Tank, And Even That 10% Employee Cull At McClatchy May Not Be Near Enough

Philip M. Stone June 18, 2008

A Standard & Poors (S&P) analyst has really put the cat among the pigeons by naming four US newspaper groups he thinks could be in danger of defaulting on their debt, and there are others out there he didn’t mention that are already on the edge.

In a Bloomberg interview S&P analyst Emile Courtney suggested that those groups in danger of defaulting on loans include MediaNews (Dean Singleton), The Journal Register Company (already thrown off the New York Stock Exchange because its shares fell to under $1 – they closed Tuesday over the counter at 20 US cents), and Morris Publishing (last November it sold 14 daily newspapers for about $115 million in what was widely seen as a fire sale, using $85 million to pay down debt  but still choking on the remaining $428 million debt.)

And that doesn’t take into account a S&P report that at the beginning of June Philadelphia Media Holdings, publisher of the Philadelphia Inquirer and the Philadelphia Daily News defaulted on a secondary interest payment on $85 million of debt underwritten by The Royal Bank of Scotland. The newspaper group was formed in 2006 when Philadelphia investors stumped up $562 million to buy the newspapers from McClatchy that had got them but didn’t want them in its Knight Ridder deal. At least $380 million of the sales price came from loans. The company is said to be looking for another $8 million in equity investment.

Nor does it include the Minneapolis Star Tribune, bought by Avista Capital Partners, a New York-based private-equity fund for $530 million in 2007, using nearly $430 million in debt. Two months ago, Avista wrote down the value of its own $100 million investment by 75%, and asked creditors for a delay in debt payments and basically got told that before that would happen the private-equity firm should invest a further $50 million – not exactly what Avista wanted to hear.  Creditor discussions continue.

As for the Journal Register Company, back four years ago, in a flurry of praise from bankers who were encouraging newspaper companies to grow top-line revenue through buys funded with relatively cheap credit, it went and borrowed some $415 million to buy four daily newspapers and 87 non-daily newspapers in Michigan, home to the troubled US auto industry. Yes, they went and bought newspapers in Michigan! 

Journal Register’s long-term debt is now standing at $625 million and yet the value of its newspaper properties is thought to be around half that. There is a fear that debt covenants could be breached next month. Not only is the company hard hit by falling advertising revenues but also by falling newspaper valuations – now at about six times earnings compared to near double that a couple of years ago.

Even Tribune may not be out of the woods. With the sale of Newsday, Tribune has said its debt payments for this year are taken care of, but S&P and bond holders don’t seem so sure. S&P says newspaper advertising revenues are sinking so fast that it believes that come December Tribune may have to sell more assets, and Tribune’s 2010 bonds are at “distress” pricing -- they are selling for less than 80 cents (69.5 cents) on the dollar meaning the holders believe they could go into default.

As for MediaNews, Singleton’s private company this year made a deal to provide its financial statements directly to its bondholders and the bondholders then agreed MediaNews no longer needed to make such filings with the Securities and Exchange, so we can only surmise on how it is doing from its last published accounts in February (like everyone else the numbers were down).

For S&P to say now that MediaNews could be in danger of default would indicate it has seen that information made available to bondholders. S&P noted last October thatMediaNews is "pursuing amendments to financial covenants for the current period in its secured credit facility that we expect the company to achieve over the near term," so debt was a problem then and the worsening advertising revenue flow can’t be helping that problem any now.  S&P has slashed MediaNews’ credit rating down to B-  which is considered low grade and speculative and could become impaired in adverse business, financial or economic conditions (In other words, today’s newspaper financial climate).

And remember MediaNews along with Hearst paid about 11.5 times earnings for the $1 billion worth of four Knight Ridder newspapers they bought off McClatchy, but today’s valuations, with vastly lower earnings, are about 6.5 times earnings.

The problem for everyone has been how newspaper advertising revenue has sunk – McClatchy said its May figures were 16% down over May last year. No one foresaw $4 a gallon gas, that food prices were going up by double-digit percentages and that the general economic slowdown would cause advertisers to keep their hands in their pockets. Thus all of that expected cash flow – something newspapers are famous for – that was to have gone to pay off debt is suddenly no longer there in big enough numbers. And to add injury, valuations have dropped by nearly half within a couple of years.

McClatchy’s statement on Monday it was culling 10% of its workforce came as a major shock – that is not McClatchy’s usual way of doing things and showed that desperate times call for desperate measures. And yet CEO Gary Pruitt told Reuters that while he hoped that was all he would need to do he could not rule out another cull. Reading some numbers on Alan Mutter’s blog out of San Francisco would indicate the cull just skims the surface of the problem. The situation is dire.

Mutter’s math says that based on what has happened so far this year, with the prognosis for the rest of the year that  things are not going to impriove, McClatchy’s 2008 revenue is going to be about $295 million less than last year. Yet that 10% cull is expected to come up with savings only of about $70 million this year, just 24% of the shortfall. Even if it sells some properties and makes other savings there’s still a huge gap to fill.

So, while we readers may complain about the editorial product that is now being delivered to our door there are some publishers out there with a far greater concern – staying out of bankruptcy court.