Lee dodges bankruptcy

It may be “good news” for the lenders and management of Lee Enterprises that the company was able to renegotiate the loans that threatened to plunge the publisher into bankruptcy this spring.

But the strict new terms of the loans will step up the pressure on the company – and, therefore, its employees – to achieve the stringent profit targets established in the new financings. Failure to stay on the straight and narrow in the best case will result in higher interest payments and in the worst case could put the company back at risk of default.

Lee’s auditors on New Year’s Eve issued a “going concern” letter expressing doubts about the company’s ability to continue as a sustainable business because it lacked the cash to make a payment on a $306 million note due in April.

In the new financings announced yesterday, the company repaid $120 million of the loan due in April and stretched out the rest of the payment over three years. At the same time, the company was able to revise the terms on another $1.1 billion in debt to buy more time to pay it back.

In an example of how this works, the company now is obligated to pay only $22.1 million against the $1.1 billion in September, instead of the previous requirement to pay $54.9 million. At the same time, the company has agreed to pay higher interest rates on the loans, which will reduce the resources available for investing in the business or restoring its dividend, which was suspended as the company mustered all available cash to service its debt.

The interest rates on Lee’s loans in the future will be calculated on sliding scales that measure the ratio of the company’s debt to its profits. The lower Lee’s profits go, the higher its interest payment will be. That, in turn, will require more of the company’s profits to be plowed into interest payments, instead of, say, investments in staff or new interactive products.

To keep borrowing costs down, therefore, management will be endeavoring to keep profits as high as possible. In the absence of robust sales, this potentially could mean further cutbacks in staff, newshole and perhaps even the suspension of publication on certain unprofitable days of the week.

Given the parlous condition of the economy and the newspaper industry, Mary Junck, the chief executive of the company, is justified in calling the agreement “good news.” Operating as a going concern is far better than operating in bankruptcy. But let’s not get carried away.

While dodging bankruptcy helped lift Lee’s stock by 57.6% today to 52 cents a share, the company’s shares are still well below the $1 minimum required for continued listing at the New York Stock Exchange. And Lee’s stock is 95.4% lower than it was one year ago today, when it closed at $11.32.