Sunday, August 10, 2008

Default-O-Matic update: TribCo at most risk

With the default last month of Journal Register Co., the Default-O-Matic now shows Tribune Co. as the publisher most likely to be unable to repay its debt in the future.

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

Since the Default-O-Matic was launched here six weeks ago, not only did JRCO hit the wall but the ratings of three of the nine remaining publishers were downgraded by Moody's. In addition to Tribune, the others taken down a few notches were GateHouse Media and Scripps.

Journal Register on July 31 slid from the lowest-possible junk rating to the D category when it suspended payments on its $640 million in debt.

In a complicated arrangement, JRCO’s lenders agreed to a holiday on interest payments until Oct. 31 in the hopes the company can reorganize or be sold. If something doesn’t happen by that date, there is no plan for the lenders to extend the so-called forbearance period. Given that the company has stopped paying cash interest and that its liabilities outweigh its assets, its condition is “tantamount to an event of default,” said Moody’s.

With Journal Register effectively off the board, the publisher at the highest risk of default now is the Tribune, which owes some $12 billion and is among the most aggressively leveraged of all publishers.

Just six months after being taken over in an high-risk financing engineered by Sam Zell, Tribune’s rating dropped two notches on June 23 into the lowest tier in the junk-bond category. At its new Caa2 rating, Tribune’s issues are considered to have a 48.3% chance of not being repaid in conformance with the terms of the borrowing. In announcing the rating reduction, Moody’s added that the outlook for Tribune is “negative,” signaling the possibility of future downgrades.

Also busted to the lowest junk-bond tier since the Default-O-Matic debuted on June 23 was GateHouse Media. GHS is rated as having a 35.6% chance of default, and its outlook, like Tribune’s, is “negative.”

The third publisher to be downgraded in the last six weeks was Scripps, which dropped three notches from its prior position after its interactive division was spun off on July 1. Despite the reduction, the company’s issues remain investment-grade securities with a comfortable 2.6% probability of default.


Anonymous Anonymous said...

Alan, this is a great effort, but I am totally flummoxed about how to judge Media News in light of this mysterious Connecticut sale to Hearst. I think your rating for Media News is still too generous, especially since you can buy Media News debt for about 40 cents on the dollar. That would mean the market is grading them in the C's, not B's. But we are floundering in the dark about some of these companies, especially Media News. They have cleverly hidden the true picture of their financial condition. Not necessarily a bad thing. If I were in their place, I would do the same thing, because I certainly cannot believe the news is in any way good.
I also recommend highly reading the transcript of Friday's Gatehouse conference call for the Alice in Wonderland explanation of how taking on more debt is going to lead to less debt.

8:38 AM  
Anonymous Anonymous said...

I love this graphic, because it shows the real impact of family-controlled enterprises running publicly traded newspaper companies.
On the one side you have cousin Jane and Arthur who are not really interested in newspapers, but live on the proceeds of dividends they inherited from their newspaper empire founder grandfather. On the other side, you have company executives that face the choice of cutting dividends to keep their interest payments on debts low, or leave dividends high to satisfy the needs of cousin Jane and Arthur, and instead cut payrolls and other expenses to make the higher interest payments.
Here's a link to a Bloomberg piece that discusses the New York Times dilemma:

6:56 AM  
Anonymous Anonymous said...

As a Gatehouse employee, we are being continuously told that the company will turn around soon. We are assured there is no danger at this time, since our biggest investors are also the company higher-ups. That said, I just don't buy it. I remain concerned with sale, as I don't feel Gatehouse has made necessarily wise decisions with our local franchise. I can't tell if it's just a hard time to be in the business or a hard time to be in Gatehouse.

2:46 PM  
Anonymous Anonymous said...

Unfortunately, Alan, the worsening debt picture is only part of the story.
We need somehow to take a look at
the declining value of newspapers on today's market.
Take the Seattle Times. In 2000, according to a story in the Seattle Post-Intelligencer this week, McClatchy in 2000 offered to buy the Seattle Times for $500 million, plus the assumption of $200 million in debts. That puts the value of the newspaper at around $700 million in 2000.
The offer was rejected, but McClatchy coincidentally picked up a 49.5 percent ownership in the Seattle Times from its purchase of Knight-Ridder. This week, McClatchy filed papers with the Securities and Exchange Commission valuing those holdings today at $9.9 million. That puts the value of the Seattle Times at $20 million.
Wow, $700 million to $20 million in eight years. I wonder if there are other newspapers that have been so precipitously devalued?
We have some previously very attractive monopoly newspaper properties on the market now, including the San Diego Union and a collection of Maine newspapers dominating the state. There are also ailing papers in two-paper towns like Chicago's Sun-Times, and the St. Paul paper is closely watching while Avista looks for someone to pick up the Strib, without much interest.
I have yet to see any dollar figure put on the mysterious Hearst purchase of Singleton's Connecticut papers.
Just two years ago, there was all this interest in newspaper properties, capped by Sam Zell's purchase of TRB. Today, the buyers are few and very far between.

6:59 PM  
Blogger rknil said...

Alan isn't grading them. Those are Moody bond ratings in the chart.

9:41 AM  
Anonymous Anonymous said...

Are these chains in the business of delivering paper or content?

Based on the layoffs and firings, I am going with the delivery of paper.

Too bad consumers want delivery of content.

7:42 PM  

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