Thursday, 2 October 2008

Newspaper and NYT Company Debt and the need to invest

Problem: you're P&O, one of the oldest shipping companies in the world, respected, trusted, established. Unfortunately you own a very large fleet of sail ships and this new thing called steam power has come along. Clearly it's the wave of the future (excuse pun) - no more loitering in the doldrums waiting for trade winds, what you need is to transition your fleet out of sail and into steam.

To do this you'll need to be savvy enough to know how to phase out your sail fleet and start buying steam ships. You're also going to need to go the capital markets (unless you sit on a LOT of cash) to borrow capital to buy all these fancy new ships. In order to do this you'll need a very good debt rating.

P&O had all of these things - the savvy to know what and when to do something, a good sense of timing, transition skills but most importantly a terrific reputation in the City of London where they were able to raise all the necessary capital. Today P&O are still with us, and are one of the largest shipping companies in the world.

It's a metaphor I like to use for the problems newspapers face, as they work out how to transition out of Newspaper 1.0 and being Newspaper 1.0 companies, and into Newspaper 2.0 and being Newspaper 2.0 companies (which probably means, long term, being an Internet company).

However, current credit markets are the worst in decades, and more to the point, newspaper debt is pretty much junk rated.

It's time to raise capital, because you don't buy a fleet of shiny new steam ships on junk rated debt. As these newspapers are finding out.
So what you have is a climate that demands investment and/or acquisition to save your multi-generational family business but your debt on the edge of junk status. In fact some commentators already describe NYT Co debt as de facto junk.
Just for the record the Times' debt has Baa3 rating and hopes that recent consolidation of production facilities and plans for staff reductions will bring enough cost savings to reduce its $1.1 billion debt load.
Now in a crappy market for Newspaper 1.o, and just a crappy market generally, selling ads and subs and kiosk copies is a hard slog and they were basically hoping to do this before the end of 2009 (my guess and that of others). To reduce the debt by selling a sailing ship, well, that's a hard sell in the age of steam. I'd say they'd be lucky to get half of what they paid the WP for their 50% stake in the IHT, if that, and even that, or the Boston Globe or all their little newspapers is hardly going to put much of a dent in $1.1 billion of debt.
The Times have said in a statement that it can handle its credit facilities to "easily" service its debt. But I am reminded of a NYT article, was it today or yesterday, about the last words of companies going under being positive spin from their CFOs and CEOs to the media.
Not suggesting the NYT is going under, just making the point that I, and therefore presumably the credit markets, don't give quite as much, well, credit, to this type of bullish talk these days.
Things are moving fast for Newspaper 1.0 and the tipping point approaches. Time for the Times to move to Newspaper 2.0.

Newspaper in Minneapolis Halts Its Debt Payments (NYT)

Published: October 1, 2008
The Star Tribune of Minneapolis said on Wednesday that it had stopped making payments on its debts, the latest evidence of the trouble the newspaper industry is having with debt loads it took on in 2006 and 2007.

The Star Tribune skipped a $9 million quarterly payment to its senior creditors that was due on Tuesday, said Chris Harte, the publisher and chairman. The paper has been in default since June, when it began missing payments on its smaller junior debt.
With advice from the
Blackstone Group, The Star Tribune has been trying to negotiate new terms with its lenders, a consortium of banks, insurance companies, hedge funds and others.
The paper has cut its staff and reduced other operating costs, while trying to obtain wage and work rule concessions from its unions.
The default means that lenders could force a bankruptcy, but they have been reluctant to take that step with battered newspaper companies as long as there appeared to be a chance of agreeing on new repayment terms.
“In this market, trying to liquidate newspaper assets might not produce the same recovery,” said Mike Simonton, a media analyst and senior director at
Fitch Ratings.
Mr. Harte said, “Any of the stakeholders that have the capability of forcing us into bankruptcy, it would not benefit them at all, and I believe they see it that way.”
Avista Capital Partners, a private equity group, bought The Star Tribune last year for $530 million, and the paper still has $432 million in debt from that deal.
Executives say the paper generates an operating profit, but will not say how much.
The Star Tribune is one of several newspaper companies that, despite multiple rounds of job cuts, are struggling to meet payments or covenants on debt.
Nearly every major newspaper company has been through multiple credit downgrades, and several are below investment grade.
The companies took on most of that debt in just the last few years to finance a wave of newspaper takeovers at prices that, even at the time, analysts said were unreasonably high — and that came just before advertising revenue began to plummet.
The McClatchy Company bought the Knight Ridder chain in 2006 and then sold some former Knight Ridder papers, including The Star Tribune and The Philadelphia Inquirer and Daily News.
McClatchy still has ample cash flow to pay its debts, but was in danger of not having enough to comply with its bond covenants, a condition that would have meant a technical default.
On Friday, McClatchy said it had negotiated new terms with its lenders that would prevent a default, but would carry higher interest rates. Days earlier, the company announced that it would cut its dividend in half.
In June, Philadelphia Media Holdings, owner of the papers in that city, fell out of compliance with its bond covenants, though it continued to make payments.
In July, the Journal Register Company, owner of The New Haven Register and a group of smaller papers, entered into a forbearance agreement with lenders, allowing it to skip some payments.
Several analysts have warned that two of the largest newspaper companies, the
Tribune Company, which tripled its debt in going private last year, and the MediaNews Group, which bought a string of papers in recent years, are at high risk of default.

OCTOBER 2, 2008
Financial Downturn Further Weakens Newspaper Publishers (WSJ)

The financial turmoil is adding headaches for troubled newspaper publishers.
The Star Tribune said Wednesday it skipped a debt payment as the Minneapolis newspaper tries to restructure $430 million in borrowings. Publisher Chris Harte indicated the company is testing all options with its lenders.
Gannett Co., the country's largest newspaper publisher, meanwhile said Wednesday it had tapped its credit line as short-term financing markets stall. And alternative weekly publisher Creative Loafing Inc. filed for Chapter 11 this week.
The credit crunch has further weakened newspaper publishers, which already are reeling from a prolonged drop in advertising revenue. Several major chains.....

Newspapers (

For Newspapers, The Storm Gets More Perfect

James Erik Abels and Tom Van Riper 10.02.08, 6:00 AM ET

More bad news for the newspaper industry this week: The cash-starved New York Sun went under Monday and Wednesday the Minneapolis Star Tribune said it was skipping a $9 million quarterly debt payment, prompting worries of a potential bankruptcy. But that's not the worst of it.
Standard & Poor's Wednesday put newspaper giant Gannett (nyse:
GCI - news - people ) on credit watch, concerned revenue declines could accelerate at the newspaper giant. The company downplayed the move in a statement with CEO Craig Dubow saying its "underlying fundamentals remain strong."
With the nation's financial system in the grips of a
credit crunch, Gannett and the rest of the already-weak newspaper industry are in a tough spot. With sinking credit ratings and tight debt markets will make it tougher for them to invest and survive.
With lower leverage--and "substantial" free
cash flow--than many newspaper companies, Gannett may have less trouble than others, Moody's John Puchalla says. For better or worse, it's stayed clear of big, expensive acquisitions as well. He's more concerned with competitors like The McClatchy Company (nyse: MNI - news - people ) and The New York Times Co. (nyse: NYT - news - people )
One reason: McClatchy has not diversified well to withstand an advertising downturn, a problem it is facing in important markets such as Florida and California. Last Friday, the company announced it restructured some $1.175 billion in debt payments to lenders. It holds a B2 rating from Moody's, which is below
investment grade.
At a Baa3 rating, the Times' debt rating isn't junk--yet. The company is hoping that recent consolidation of production facilities and plans for staff reductions will bring enough cost savings to reduce its $1.1 billion debt load. The tough market for selling newspapers may make that impossible. "If they don't get there by 2009, their rating will probably go down," says Puchalla.
The Times said in a statement that it can handle its credit facilities to "easily" service its debt.
According to a spokesman, the Star Tribune has hired Blackstone to handle debt-restructuring conversations with lenders, and the skipped payment on their $432 million in total debt was not the immediate result of the credit crises--falling revenue is the issue--though it is affecting renegotiations.
"Certainly the tightening of the credit market makes it tougher for everyone to evaluate," he said. The Star Tribune previously stopped making debt payments to a group of investors who helped finance its $530 million acquisition last year by New York private equity firm Avista (nyse:
AVA - news - people ) Capital Partners.
"When the economy is wavering, you can expect the ad-revenue environment could actually deteriorate even further," says Lauren Rich Fine, a former Merrill Lynch (nyse:
MER - news - people ) newspaper-industry analyst and now a mass communications professor at Kent State University. "I do think a lot of companies will break their covenants, but I would expect their banks to work with them."
The problem may be particularly acute for players who have concentrated on acquisitions in the last few years. For instance, Journal Register Co. (nyse:
JRC - news - people ), whose stock was delisted from the New York Stock Exchange this year, bought nothing but trouble when it paid $415 million in 2004 for 21st Century Newspapers, a chain of Michigan papers that have been battered by a troubled U.S. automotive industry.
The company now has $642 million in debt and a market cap of a just $275,000 (not a misprint). It's rated junk by Moody's. Journal Register did not return a call for comment.
That leaves the industry keeping close watch on Sam Zell's Tribune Co. (nyse:
TRB - news - people ), now famous for a $8.2 billion buyout deal last year that boosted the company's debt to more than $12 billion, about six times its market cap. But despite those numbers, Fine argues Zell's creditors will keep betting on him even if the advertising market tightens further because of his willingness to sell off assets. The company did not return a call for comment.
One bright spot: Washington Post Co. (nyse:
WPO - news - people ) is rated highly by Moody's (A1). Its half-billion dollars in debt represents only 10% of its $5 billion market cap. The company has been bulwarked against a troubled advertising market by its Kaplan test-prep business. The newspaper industry has been fighting to recreate its business model over at least the last decade, diversifying away from being solely supported by print advertising sales. They'll find that job tougher than ever now.


International Herald Tribune
New York Times

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