MxClatchy Bank Deal Eases Threat of Default

McClatchy Co. won concessions from banks that spared the newspaper company from a threat of default on its debt.

The publisher of the Sacramento Bee and Miami Herald said Friday its banks agreed to loosen restrictions on the company's level of debt compared to cash flow, and its ratio of interest payments to cash flow.

Analysts had said McClatchy needed to secure the changes by Sept. 30, or the company risked a technical default on its debt. A default notice could trigger a bankruptcy-court filing.

McClatchy said it believed "the impact of the current environment on our cash flows" made it necessary to amend its bank agreement. "There were no internal projections indicating we would be in default in the third quarter," a McClatchy spokeswoman said.

Like nearly all newspaper companies, McClatchy has suffered from a steep downturn in advertising revenue as the economy cools and as marketers continue to shift advertising to the Internet. McClatchy's pains are exacerbated by about $2.1 billion in debt, much of it tied to the company's purchase of publisher Knight Ridder Inc. in 2006.

Worries about possible bank defaults have helped crush the company's stock price, which has dropped 77% in the last year. McClatchy's credit rating is deep into junk territory.

The announcement about the amended credit agreement came after the close of regular market trading. McClatchy shares rose 5.9% to $4.50 at 4 p.m. on the New York Stock Exchange, with much of the rally in the last hour of trading.

The company continues faithfully to pay interest on its debt, though falling revenue means McClatchy has been tiptoeing near covenant limits on its bank debt. The covenants currently limit McClatchy's debt to five times its adjusted cash flow. The ratio was just under 4.5 times at the end of the second quarter. Under the new agreement, the ratio can now go as high as 6.25 through the fourth quarter.

By: Shira Ovide

The Wall Street Journal; September 30, 2008

McClatchy Needs Some Paper Work

Reality bites. McClatchy Chief Executive Gary Pruitt's decision to quit as a trustee of the McClatchy family trusts is an ominous sign for shareholders in the newspaper publisher. While it is good corporate governance for the CEO to distance himself from the company's controlling shareholder, it could herald a painful deal for McClatchy's long-suffering shareholders.

That realization appeared to spread Tuesday, as McClatchy stock, which had jumped on chatter that the company could be preparing to go private, fell. A refinancing deal is more likely, which would dilute or even wipe out the remaining equity value. McClatchy's market value is about $300 million. This might appear to be a radical solution for McClatchy, which is still generating cash. And its liquidity should improve somewhat soon if it suspends its $59 million annual dividend payout.

The problem is the worsening newspaper fundamentals. In the six months to June, McClatchy generated $173 million of earnings before interest, taxes, depreciation and amortization, easily covering $82 million in interest costs. But that Ebitda was down from $280 million a year earlier, as revenue plunged 15%.

At that rate of decline, it won't be long before McClatchy can't cover its interest bill. Indeed, the cost of insuring against default by McClatchy has soared this year, to about $1.5 million from about $525,000 per $10 million of debt, according to data provider Markit.

And industry conditions aren't getting better. McClatchy's July ad revenue was down 19%. The best solution for McClatchy is to figure out a way to convert some of its $2.1 billion debt to equity. Shareholders may very well be the walking dead.

By: Martin Peers
Wall Street Journal; September 10, 2008