Default-O-Matic update: Closer to brink
The publishers most likely to be unable to satisfy the terms of their debt are MediaNews Group and Morris Publishing, according to the latest ratings from Moody’s Investors Services, a company hired by borrowers to gauge their likely ability to repay their debt.
The debt of MediaNews and Morris each is rated Caa3, which reflects a 72.9% chance that the company will not be able to fulfill its debt obligations. Morris already has retained bankruptcy lawyers but officers of privately held MediaNews steadfastly have asserted that the company is in better financial shape than its ratings would suggest.
After those two publishers, the newspaper company next most likely to default is McClatchy, according to Standard and Poor’s, a competitor of Moody’s. S&P, which uses a different nomenclature than Moody’s, scores MNI’s debt at CCC, which is one notch higher than the MediaNews and Morris ratings. A CCC rating indicates a 48.3% chance of default.
Although the bond rating agencies usually come out fairly closely on a company’s rating, McClatchy gets a far better score from Moody’s than from S&P. Moody’s rates MNI at Ba2, which indicates only a 7.5% chance of default. McClatchy has renegotiated the terms of loans due in the second half of this year. While Moody’s believes the company to be able to comply with the new terms of the obligations, the ratings by S&P and Fitch, yet a third rating service, suggest a considerably higher level of doubt.
The companies that already have gone over the brink are Tribune Co., the Minneapolis Star Tribune and Journal Register Co. Less than a year after being taken private in a daring $13 billion transaction, Tribune filed for bankruptcy protection from its creditors because it could not make certain scheduled loan payments. The magnitude of the numbers was much smaller but the story was the same at the Strib.
Although over-leveraged Journal Register has not filed for bankruptcy protection, it has stopped repaying its debt to conserve cash, has quietly closed more than three-dozen weekly newspapers and has seen the value of its shares fall to barely half a cent.
Last week, the company announced that the agreement which permitted it to suspend interest payments has lapsed and "there can be no assurance" of "a consensual restructuring" of the debt or that its lenders "will not seek to enforce their rights under the credit agreement." In plain English, this means the creditors could take over the company.
The Default-O-Matic survey is by definition anecdotal, because published bond ratings are not available for all newspaper companies. Notwithstanding this limitation, the trend is instructive, if not to say chilling.
Since the last D-O-M update in August, the New York Times Co. tumbled into junk-bond territory after previously being considered an investment-grade credit. At a rating of Ba3, NYT is a relatively high-quality junk bond with a 10.7% probability of default. NYT is mortgaging a portion of its new headquarters in New York and borrowing $250 million from a Mexican telecom magnate to strengthen is finances.
Here’s why a slide to junk-bond status matters: Insurance companies, pension funds and many other institutions are not permitted to buy junk bonds because the likelihood of repayment is deemed to be too risky for a prudent fiduciary. They are permitted to buy only invest-grade securities.
A company with a junk rating has to pay higher interest rates to the community of investors who have the appetite for such risk. In the current credit-constrained environment, a borrower losing its investment grade status would see its interest payments rise by 33% or more.
With the NYT in junk territory, only three newspaper companies retain investment-grade status: Washington Post Co., E.W. Scripps and Gannett.
While WPO recently received confirmation of its A1 rating, the highest mark of this group but five notches from the highest possible score, Gannett was downgraded to the lowest of the five levels in the investment-grade category. Now rated Baa3, GCI joins Scripps, which has been at the same level since the summer.
In cutting Gannett’s credit rating last week, Moody’s said it was commencing a “review for further downgrade.”
So, the Default-O-Matic may be making another appearance before long. (Click the image below to make it larger.)