How close to default is your paper?

The newspaper industry shuddered last week when Bloomberg News warned that several publishers are in danger of default. And some are. But there are many degrees of defaultness and not all publishers are in equal danger of going down the drain.

So, I have created not only the word “defaultness” but also a simple tool called the “Default-O-Matic” to help you see at a glance the degree of financial peril faced by 10 of the largest publishing companies. I will update it from time to time, as events warrant.

The Default-O-Matic predicts a company’s risk of default by using ratings provided by Moody’s Investors Service, one of the three independent agencies hired by bond issuers to assess their ability to repay the money they borrow.

Journal Register Co. is the shakiest in the group of 10 publishers, with Morris Publishing in second place and a tie for third between MediaNews Group and Tribune Co. We’ll explain the findings in a moment. First, some background:

Failure to fulfill the conditions of a bond is called a default. But not all defaults are equally severe.

Default could be as simple as a company making less money than it had hoped to make but still being able to pay its interest payments on time. That is considered a technical default, which may trigger certain consequences like financial penalties or higher interest rates. But the company would go on to fight another day.

At the other extreme, the word “default” also describes the situation that occurs when a company lacks the money to pay some or all of its obligations at the time they are due. In that event, the company could be taken over by its creditors and either reorganized, sold or even shut down. Click here for a full discussion of bonds, bond ratings and how they increasingly are affecting the American newspaper business.

Moody’s and its competitors use confusing alphabet-soup nomenclatures to express their confidence in a company's abilty to fulfill its obligations. Based on the statistical analysis described here, Moody’s rates the probability of default by percentage for categories ranging from Aaa (the best, with zero chance of default) to C (the risk is deemed to be 100%, because the company already has defaulted).

While considering the credit ratings, bear in mind that Moody's and its peers at Standard and Poor's and Fitch issued triple-A ratings on many subprime mortgage portolios right up until that business cratered. They also rated Enron's paper as investment-grade securities until four days before the company collapsed and filed for banruptcy.

As you can see from the blue bar on the Default-O-Matic (click the image below to enlarge), Journal Register, which remains in my personal portfolio because its two-bit shares would cost more to sell than they are worth, is theoretically the closest of any of the publishers to default.

Its rating of Caa3, which indicates a 72.9% probability that it will fail to meet its obligations, was cut in mid-May from Caa1, which carried a 35.7% risk of default. Not long before that, the company was rated B1, which signified a 15.2% risk. If conditions don’t turn around for the company, the next stop would be C, which would signal the company is in a hard default, not a technical one.

The next-weakest credit among the publishers is Morris Publishing at Caa1 (35.7% risk). And then come MediaNews and Tribune, which both are rated B3, representing a 26.4% chance of default.

The Washington Post Co., which derives the majority of its revenues from things other than newspaper publishing, is the strongest credit at A1, representing a default risk of just 0.2%. Scripps, which also is highly diversified away from newspapers, is the second-strongest credit. And Gannett, which has lots of newspapers but comparatively modest debt, is the third-strongest.

Apart from the fact that six of the 10 publishers are deemed to be in junk-bond territory, the other distressing phenomenon revealed in the Default-O-Matic is that the ratings of seven companies have been downgraded in the three months since I published the last list of bond ratings on March 18.

If this proves to be the “worst year on record” for newspapers, as a growing number of analysis predict, then updating the Default-O-Matic could become a real chore.