Monday, June 23, 2008

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.


Anonymous Anonymous said...

Are these same rating agencies that said CDOs are AAA gold? How did that work out?

Are these same rating agencies that said Enron was AAA right up to one of the largest bankruptcy in American history.

I like your analysis but I would not couch the conflicted ratings agencies for the basis of the analysis.

7:15 PM  
Anonymous Anonymous said...

Where is Lee? I am sitting on 500+ shares that are getting close to worthless.

5:46 AM  
Blogger Unknown said...


You've posted the news graphic that all designers need to heed - especially those at the Tribune papers.

Here are the details

6:03 AM  
Blogger Newsosaur said...

Lee is not rated by Moody's; hence it is not included in the Default-O-Matic. I will try to get at the information in another way. Stay tuned.

7:49 AM  
Anonymous Anonymous said...

Is it not correct that companies pay Moodys for these ratings, and therefore they might not be an accurate reflection of the true financial state of these companies? For example, I believe GCI is in more dire straits than this rating table might indicate.

10:44 AM  
Anonymous Anonymous said...

Fascinating analysis. Thanks Alan.

Is Media General, like Lee, not rated by Moody's?

11:12 AM  
Blogger Newsosaur said...

The last bond rated for Media General has been paid off, so there is no current rating from Moody's, according to MEG.

11:30 AM  
Anonymous Anonymous said...

Update your chart. S&P downgraded MediaNews from B- to CCC last Thursday.

1:17 PM  
Blogger Newsosaur said...

The S&P downgrade mentioned in the prior comment would put MediaNews approximately one notch lower than shown on the Moody's scale that is used in the Default-O-Matic.

I decided to use the Moody's ratings because I had access to historical information, but the services generally track pretty closely to one another.

1:58 PM  
Anonymous Anonymous said...

gatehouse is laying of, freezing hiring

5:47 AM  
Blogger John Seiler said...

What about Freedom Communications? In June, Moody's dropped its rating to B2 (

So would that put it in the 19.9% chance of default category?

(John at

2:15 PM  
Anonymous Anonymous said...

does anyone know if jrc will close the doors of the trentoian newspaper?/???? thats a question hanging over it workers heads

5:02 AM  

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