Monday, 25 August 2008

Invest to survive...but who's going to lend the money

I've maintained for a long time that newspapers, and especially the International Herald Tribune, are going to require significant investment and short-term losses in order to survive and make the successful transition from Newspaper 1.0 to Newspaper 2.0.

The question is: who's going to lend the money given how little faith Wall Street has in newspapers, and the declining revenues of the mothership NYT.

This type of thing below hardly helps keep the faith:

Tribune Co. Faces 'Real Possibility' Of Debt Default
By Mark Fitzgerald
Published: August 22, 2008 3:15 PM ET

CHICAGO Tribune Co. faces a "real possibility" of defaulting on its $13.4 billion of debt, Fitch Ratings said Friday in a report that cut its credit rating deep into junk territory -- while warning a further downgrade is possible.
"Given the acceleration of declines in newspaper advertising revenue and cash flow at Tribune and no evidence from any participants in the industry regarding the prospects for current pressure relenting, Fitch believes Tribune's credit profile is consistent with a 'CCC' rating," Fitch said. Under Fitch's ratings definition, default is a "real possibility."
Fitch analyst Mike Simonton said in an interview that the ratings firm is not necessarily concerned about Tribune's near-term liquidity, but "operating trends" that no newspaper company can fully control -- especially the deterioration of newspaper's classified ad franchise. "Certainly there are some levers that the management tam can pull that can have a positive effect, but the one (factor) that's most important is the top-line operating trend, and that's the relentless pressure they're feeling in the classified space," Simonton said. "Until we see a reversal in those trends, default is a real possibility."
Default could mean anything from violating the debt level or repayment requirements of its loans to bankruptcy. The Chicago-based ratings firm downgraded its Issuer Default Rating to "CCC" from "B-," and said its ratings outlook is negative. Fitch downgraded all senior debt to "CCC," which the ratings firm said reflects its belief that lenders can expect to get from 31 cents to 50 cents on the dollar in a "distress scenario."
Senior debt has first priority to be paid off in a bankruptcy reorganization or other debt scenario. Fitch rated Tribune's subordinated debt as 'CC,' which it said "Fitch's estimate that 0% recovery is realistic in a distress scenario."
The credit assessment comes a week after Tribune Chairman and CEO Sam Zell -- who loaded on $8 billion in debt to take the Chicago media giant private last December -- announced the company had paid down $807 million of borrowing under is so-called Tranche X facility, and met all its obligation under that loan for the rest of the year. Tranche X's principal balance of $593 million comes due in June 2009.
"Tribune management has met or exceeded Fitch's expectations on the elements of its business over which it has more explicit control: expense containment, asset sales and exclusive dedication of cash flow toward debt repayment," said the report. "Fitch believes TRB (Tribune) management has distinguished itself from other newspaper management teams by taking aggressive actions across various areas of the company to attempt to preserve the longer term health of the company: bringing in new leadership from outside the industry, communicating directly with staff about the challenges facing the industry, reducing headcount, re-tooling incentive compensation for sales teams, redesigning the product, exploring asset monetization/utilization opportunities, and experimenting with new revenue streams."
But Fitch added it had profound doubts about the long-term prospects of Tribune.
The firm said Tribune will be "challenged to generate meaningful and consistent revenue growth." And Fitch added it "remains cautious" about the prospect of the newspaper industry's ability to capture and monetize the volume of ad dollars going to the Internet. The Fitch report portrays a company without much breathing room on its debt."
In the long run, Fitch is concerned about the company's ability to generate cash to meet its interest payments, principal amortization and maturities under its debt obligations in a timely manner," the firm said. Under Tribune's loan covenants, the ratio of debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) is 9 to 1, or 9 times, Fitch said. The firm said that as of June, its ratio is in the "low-to-mid 8 (times) range."
If business doesn't worsen, and Tribune sells the Chicago Cubs baseball team and a sports cable network as expected, it could stay under that leverage covenant, Fitch said. Even if it swings that, however, next year, the covenant ratio steps down to 8.75 times.
"While the company could receive an amendment or waiver from the banks if it breaches a covenant, in this credit environment Fitch is uncertain and cautious regarding the terms of such a potential negotiation for such a highly leveraged entity with deteriorating prospects," Fitch said. "
In this scenario, the receipt of a waiver or amendment without an upturn in business prospects is not likely to have a positive impact on the rating. However, failure to receive covenant relief could result in a restructuring -- not necessarily bankruptcy -- that would likely further pressure ratings."
Fitch also said it expected 2009 to be a "weak year" for TV broadcasting stations, in general, and especially for those, like several of Tribune's outlets, that are "affiliated with lower rated networks, e.g. The CW Network."
Mark Fitzgerald ( is E&P's editor-at-large.

International Herald Tribune
New York Times

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