The Newspaper Debt Noose Starts To Choke

Philip M. Stone October 7, 2008

Gannett has borrowed $1.2 billion from its $3.9 billion unsecured revolving credit line so it could repay some $2 billion in commercial paper debt come maturity. If it didn’t have that kind of line of credit what would have happened? Maybe it was just cheaper to use the line of credit instead of trying to refinance commercial paper in these days when banks don’t like to loan for more than a day. But maybe, after all, there is good reason why Standard & Poors put America’s largest newspaper company on credit watch with a view to downgrade even though Gannett says “Our underlying fundamentals remain strong.”

Fundamentals may be strong but S&P is not happy with Gannett’s print advertising sales falling 16.8% in August with the company’s total revenue down 9.5%. Gannett may have plenty of reserves to fall back on, and it can still keep reorganizing and firing people as it has been doing lately, but how long will it take to ride out this economic storm? And if Gannett has to call upon its line of credit to pay back debt, then what about the rest of the industry?

The Minneapolis Star-Tribune skipped a $9 million dollar payment on its senior debt last week and for the first time the publisher has not discounted the thought of bankruptcy first whispered back in April.  The newspaper, bought less than two years ago from McClatchy by Avista Capital Partners, a New York private equity firm, for about $530 million -- $432 million of it borrowed – is now thought to be worth around $125 million. Avista has asked debt holders to ease debt obligations; debt holders have told Avista to invest more itself, even though Avista has already written down 75% of its $100 million direct investment. Result: stalemate.

Have you seen the value of the Journal-Register Company lately? Shares closed last week at 0.0050 cents, a market capitalization of $196,866 (there are no missing zeros!) That’s for a company that owns 27 daily newspapers, 327 non-daily publications plus commercial printing and software development companies, and, oh yes, almost forgot, according to its Q2 statement is has $77 million in assets and is $720 million in debt. The company in July entered a forbearance agreement with its lenders that lasts through the end of this month under which interest still accrues on its loans but payment is delayed while at the same time the lenders are released from certain responsibilities, too. The aim -- to buy time for the company to figure how to get out of the mess.

And, of course, there is the biggest newspaper debt of all – Tribune. After the Sam Zell buyout its debt stands around $12.5 billion and it is desperately trying to save its pennies -- most of its newspapers have relaunched as thinner and sorrier versions of their former selves. Next big deadline is next June when a $600 million payment is due.

The company has already sold a 95% interest in Newsday, and the Chicago Cubs and its Wrigley Field are up for sale so asset-stripping seems the way forward there since cash flow is nothing near what Zell thought it would be when he took over. The Cubs, incidentally, made it into the baseball playoffs which no doubt increases their value and the team and field are expected finally to be sold for more than $1 billion – if buyers can come up with the financing given there is little credit out there – but when the deal is done that should take care of Tribune’s immediate debt payment needs, although time is beginning to run out on getting the deal done.

It seems ftm wasn’t that far off the mark last week when we suggested that the government could be the last port of call for newspaper companies facing disappearance because of their debt. If the automakers can get $25 billion in loans why not other industries? The state of California says it may need a federal government loan of around $7 billion. Are we going to let newspapers, vital for the furtherance of democracy and freedom, die because the economy has turned sour? It may well be that the fed will be the bank of last resort for more than just banks.

And traditional media debt problems are not just an American issue. Across the Atlantic the Spanish media company Prisa has announced it wants to raise €2 billion to reduce its €4.8 billion debt accumulated via big expansion in Spain and abroad.

Prisa, publisher of the leading El Pais newspaper and other Spanish newspapers, owner of a 15% stake in the French Le Monde, plus various TV and radio networks in Iberia, the US and Latin America, has seen its shares drop by more than half this year because of an advertising downturn coupled with the high debt load. The company wants to sell assets – last year it put Digital +,its pay TV satellite division, up for sale looking for around €3.85 billion but as of yet no sale although the company says it is drawing up a shortlist of suitors.  Analysts today believe Digital + is not worth more than €3 billion, but with possible buyers smelling blood, fully understanding Prisa’s need to make a deal, there is even more pressure on lowering the price.

The company says it is also looking at raising cash via a subordinated debt issue or from warrants. The Polanco family currently holds about 70% of Prisa’s shares and the idea is to bring in new shareholders while the family still maintains overall control.

Prisa’s current debt load is crippling. It is about six times earnings before interest, taxes, depreciation and amortisation (EBITDA) and the aim is to get it down to no more than three times earnings.

McClatchy in the US recently renegotiated its debt last month because it feared by the end of the year its covenant restricting debt to no more than five times cash flow would be broken, and it has bought, via a higher interest rate, breathing space to allow debt to go as high as 6.25%.

Global stock markets on Monday showed how depressing investors believe the world’s economy to be, that money is still not flowing through the banking system with banks not willing to make any long-term commitments. It’s a rotten environment in which to be selling assets; it’s a rotten environment in which to borrow or to renegotiate loans.

The people who bought the Minneapolis newspaper back in 2006 are not stupid. They paid $530 million because their crystal ball told them there would be sufficient cash flow to service the debt and still finance putting out a decent product. That so much could go so wrong in the newspaper business in less than two years is truly frightening. What is nightmarish is that there are no signs of things getting better any time soon.

Where is that fed bank window?