Liquidation unlikely as papers miss obligations

[October 13, 2008]  NEW YORK (AP) -- Newspaper companies have been skipping loan payments, missing financial targets in debt agreements and accepting higher interest rates in exchange for more flexibility -- and they're not even directly feeling the impact of the credit crisis yet.

But don't expect massive sales or closures of newspapers any time soon, even though at least four newspaper companies overburdened with debt have been forced to confront their lenders over the past few weeks.

With revenue at newspapers shrinking and few investors willing or able to buy them, lenders are loathe to force companies to liquidate assets that are plunging in value. They have few alternatives but to help newspapers stay on track with their payments and hang on until ad prospects improve -- if they ever do.

"This is not a great time to, let's say, repossess the Minneapolis Star Tribune ... and then try to turn around and sell it," said Rick Edmonds, media business analyst with the journalism think tank Poynter Institute.

The Star Tribune said Sept. 30 it skipped a $9 million quarterly debt payment to conserve cash. The next day, the investor group that owns The Philadelphia Inquirer and the Philadelphia Daily News skipped an unspecified interest payment in an apparent bid to force lenders to renegotiate.

The McClatchy Co., one of the largest U.S. newspaper chains and owner of The Sacramento Bee and The Miami Herald among other prominent papers, agreed last month to pay higher interest rates and put up more collateral.

Analysts believe McClatchy came close to a technical default under its old loan terms, which required maintaining certain a cash flow as a percentage of its debt level. The new agreement with lenders changes the formula to account for sustained reductions in revenue.

A smaller chain, Freedom Communications Inc., which owns The Orange County Register in Southern California, said last Monday that it likely fell short of required financial thresholds as well and was in active talks with lenders.

The troubles all result from reduced cash flow caused by advertising revenue plummeting faster than anticipated this year at newspapers across the nation. Readers and ad dollars already were migrating to the Internet; the weakening economy further reduced ad sales.

Many loan agreements were reached back when papers and the economy were relatively healthy. Loan terms call for the two Philadelphia dailies to earn higher profit each year, for instance, something nearly impossible to achieve now.

Though papers ran into trouble well before the bank failures of recent weeks, the ongoing credit crisis is likely to make it harder for newspaper companies to refinance or change the terms of their loans, analysts say. And the crisis is bound to dampen consumer and advertising spending even further, putting even more news companies closer to default.

Tribune Co., for instance, reported $12.5 billion in debt and has a $593 million principal payment due next June. To raise money, the media conglomerate -- which owns the Los Angeles Times, Chicago Tribune, television stations and other papers -- is trying to sell the Chicago Cubs baseball team and other sports properties. But the credit crunch may hurt bidders' ability to come up with an asking price estimated at more than $1 billion.

Journal Register Co., with $628 million in debt, also has been in talks with lenders. A forbearance agreement it reached with lenders in July expires Oct. 31, after which lenders could prompt a default for missing payments.

"It's possible that some newspaper companies are leveraged beyond the value of their assets," said Mike Simonton, a Fitch Ratings bond analyst who specializes in the media industry. "Some banks may need to restructure their debt and give these entities more time to pay off their obligations."

That is, many newspaper companies may owe sums much greater than the value of their parts.

To a large extent, lenders are forced to make do, Simonton said, "given that the liquidation value of newspaper assets in this market is likely very low."

Newspaper companies' assets are primarily in buildings, equipment and delivery trucks, Simonton said, and lenders typically count on future cash flow in agreeing to let papers take on extensive debt.

The situation is allowed to continue because -- despite the downturn in ad revenue -- most papers remain profitable, just less profitable than they used to be. So lenders, for now, come out ahead in letting papers continue to operate.

"Are lenders going to have to relent in the current environment? To some degree, but not forever," said Chris Donnelly, a vice president at Standard and Poor's Leveraged Commentary and Data unit.

Ultimately, rather than break up or sell a company, investors might decide to forgive some debt in return a partial ownership, Donnelly said. That's true because the entire sector is down, meaning there are few buyers.

In the stock market, too, newspapers' prospects are grim.

McClatchy shares are down 94 percent from three years ago based on Friday's close. The nation's largest U.S. publisher, Gannett Co., is down 81 percent over that period.

Journal Register, which owns 22 daily newspapers, has been delisted from the New York Stock Exchange and the value of all its outstanding shares stood at $315,000 Friday.

Lenders aren't backing down completely. They typically exert more control over businesses when they renegotiate loan agreements.

The McClatchy agreement, for instance, ties shareholder dividends to the company's ability to meet financial thresholds. The greater its cash flow compared to its debt, the more dividends McClatchy can give out.

There's no evidence of any forced cutbacks yet, but in the case of the Philadelphia newspapers, the current owners seeking a new deal with lenders have proposed selling the papers' headquarters building and using proceeds to reduce debt. Tribune is also considering the sale of its iconic headquarters building in Chicago, Tribune Tower, as well as the headquarters of The Los Angeles Times.

Lenders "are taking a much more active role in a sense in managing the business without having to own it," said Ken Doctor, media analyst with Outsell Inc. "They're saying, 'We'll give you some more time, more flexibility, but you have to do x, y and z."

[Associated Press; By ANICK JESDANUN]

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