Papers exiting bankruptcy dump 75% of debt

The four newspaper companies that have exited bankruptcy to date have shed three-quarters of their of debt, collectively trimming nearly $2 billion in burdensome obligations.

In so doing, the publishers will take some pressure off their newspapers to produce aggressive profits during an historic – and ongoing – collapse in advertising sales. But that doesn’t mean the staffs at those newspapers can rest easy.

As detailed in the Bankruptcy Scorecard below, the publishers who unburdened their balance sheets through Chapter 11 are MediaNews Group, which chucked 82% of its debt; Minneapolis Star Tribune, which deep-sixed 79% of its debt; Morris Publishing Group, which dumped 69% of its debt, and Journal Register Co., which unloaded 68% of its debt.

Collectively, the foursome stiffed their lenders for $1.9 billion, or 74.5% of their outstanding debt. In most cases, lenders were persuaded to forgive a portion of the debt in exchange for an ongoing ownership stake in the companies, which will have value only if the companies can be sold somewhere down the line for more than they are worth today.

With the amenable settlement of these four bankruptcies, the cases of four more publishers remain to work through the federal bankruptcy courts. Together, the publishers in the pending cases are seeking relief from $14.3 billion in debt, though most of that sum is associated with the Tribune Co., which owes creditors nearly $13 billion.

While Freedom Communications appears to be progressing towards a prepackaged bankruptcy where creditors agree in advance to the size of their haircut and the future governance of the company, the final terms of the other three pending bankruptcies are less clear. The Philadelphia Newspapers, for example, have been engaged in a long-running tussle with creditors over who will control the company when it emerges from Chapter 11. The issue may be resolved on April 27 when the company is scheduled put up for auction.

The ninth of the nine publishers that have declared bankruptcy is the Sun-Times Media Group, which was discharged last year when it was purchased for a token sum by a group of Chicago businessmen. The paper, which had no debt prior to filing, went into bankruptcy because it was running out cash to fund its operations. The bankruptcy process helped STMG unwind a number of obligations, including millions of dollars in unpaid taxes.

Publishers are using bankruptcy to strip debt off their balance sheets to reduce the amount of cash they need to generate from operations to pay interest and principal on their obligations. The high debt loads carried by publishers prior to the collapse in advertising sales caused most companies to drastically cut staffing and other expenses to try to extract enough cash from their operations to stay current on their obligations.

As advertising plunged 43% from a high of $49 billion in 2005 to an estimated $28 billion in 2009, even the most determined publishers found they could not keep up with the obligations to their creditors. The significant reduction in debt enabled by Chapter 11 gives them a chance to start with significantly cleaner slates.

But neither pubishers, nor their employees, are out of the woods. The post-bankruptcy agreements struck between creditors and publishers call for all manner of stringent performance standards, not the least of which is exacting profit targets.

To the degree newspaper revenues continue to slide – as they appear to be doing by double-digit levels in the first months of this year – publishers will be challenged to deliver on the fresh promises they have made.

And that could lead to more of the production consolidation, job outsourcing, staff cutting and news hole shrinking that characterized the pre-Chapter 11 era.