Wednesday, October 01, 2008

Strib default: What’s next

The sheriff is unlikely to show up soon to padlock the doors of the Minneapolis Star Tribune, which reported today that bankruptcy is one of its options now that it failed for the second quarter in a row to pay the interest on its debt.

As long as the newspaper generates enough sales to cover its operating expenses, it is safe to bet its lenders will forbear for one simple reason: They don’t have any better ideas for managing the newspaper than the people running it now.

For the time being, therefore, the lenders and management will be stuck with one another, because:

:: It almost certainly would be impossible to peddle the newspaper to another operator at even its current indicated value of $125 million, or 25 cents on each of the 530 million dollars paid for it in December, 2006.

:: The liquidation of the presses, trucks, desks and electric pencil sharpeners would scarcely raise the $486 million (plus back interest) that would be necessary to extinguish the debt.

Since the paper first defaulted on a loan payment in June, it has been involved in ongoing negotiations with its lenders. The talks probably have covered such topics as cutting operating expenses, selling assets, extending the due dates of the loans and having the company pay higher interest rates.

If the discussions proceed fruitfully, the paper some day may announce an agreement similar to the one reached last week between McClatchy and its creditors. In that agreement, MNI chopped its dividend and accepted an interest rate that could run into double digits in the worst circumstances. At a 10% rate, the interest on MNI’s $2 billion in debt would be $200 million a year, or enough to compensate 2,000 employees whose salary and benefits averaged $100,000 apiece.

If management and the lenders at the Strib fail to come to terms, the company may file a Chapter 11 bankruptcy petition to seek court protection from the lenders and other creditors. Click here for details on what it means when a borrower is in default and here for background on the process and implications of bankruptcy.

Whether management informally bargains with creditors or formally seeks bankruptcy protection, the aim is the same: To buy the business enough time to improve its sales and streamline its operations to improve profitability.

So long as all parties feel the process is working, the business will remain a going concern. In the event the company can’t generate enough cash to pay employees, buy newsprint or fuel its fleet, it will hit the wall.

And someone will get a great deal on a used electric pencil sharpener.


Anonymous Anonymous said...

Yes, but both you and I know that these newspaper companies rely on the credit markets to even out the dips and surges of revenues throughout the year, with Q4 being the bonanza quarter. So what happens if this Q4 is a bust? You would have to be blind, deaf and sleeping on a Pacific island not to realize the impact on newspaper revenues of what is going on in our economy. These heavily indebted companies (and it is not just Strib and MNI) are going to have to turn to the debt markets to make their payroll and other fixed expenses, and they are then going to find no interested buyers this time. The collapse of newspaper high-flyers will mirror that of Wall Street debt-addicted investment banks as this economy deleverages. Only those who capable of paying their electricity bill are going to be interested in that electric pencil sharpener.

6:50 AM  
Anonymous Anonymous said...

No worries. We will only need forebearance until Jan 20, 2009.

Obama, in repayment for our help in securing his victory the election, will push through a government bailout package for our industry, to ensure a "Free and independent Press"...

10:05 AM  
Anonymous Anonymous said...

Bankruptcy should not be such a dirty word, and it is one that soon will be connected with newspapers across the land. There's no sheriff carrying padlocks with a Chapter 11, which was written to provide a breathing space to see if a company can make it before moving to a Chapter 7 auctioning off of the pencil sharpeners. Chapter 11 also provides all sides a solid look at the real balance sheets of these companies, something newspaper executives certainly don't want the world to see. Chapter 11 also provides the financing to make the payroll and immediate expenses to keep operating, something some of these companies are going to need real soon. It would put a stop to siphoning off operating funds to buy more ranches and pay for corporate jets. It could be very healthy for the future of many newspapers to have a full disclosure of where the money has gone.

2:51 PM  
Anonymous Anonymous said...

This is indeed frightening stuff. But I guess chap 11 will have to be an option. The airlines have mostly all gone bankrupt and are still around.

4:50 AM  

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