Fitch Ratings has upgraded The McClatchy Company's (McClatchy; NYSE: MNI) Issuer Default Rating (IDR) to 'CCC' from 'C' and removed the Rating Watch Positive. In addition, Fitch has assigned a 'CCC/RR4' rating to its $875 million 11.5% secured notes due 2017. Proceeds of the notes are expected to be used to reduce borrowings under the credit facility and fund the company's tender offer of its 7.125% notes due 2011 and 15.75% notes due 2014. The notes are secured by the same assets and guaranteed by the same subsidiaries that secure and guarantee the bank debt.
Fitch has taken the following ratings actions on McClatchy:
--IDR upgrade to 'CCC' from 'C';
--Senior secured credit facility and term loan upgraded to 'CCC/RR4' from 'C/RR4';
--Senior secured notes assigned 'CCC/RR4';
--Senior unsecured guaranteed notes ratings affirmed at 'C/RR6';
--Senior unsecured notes/debentures affirmed at 'C/RR6'.
Fitch expects to withdraw the 'C/RR6' rating on the senior unsecured guaranteed 15.75% notes, upon the successful completion of the tender offer.
There is no Rating Outlook assigned.
The ratings reflect the following key considerations:
--The upgrade reflects the issuance of the $875 million senior secured notes and the use of the proceeds to repay 2011 maturities. This will satisfy a significant amount of 2011 maturities and postpone refinancing risk to 2013, providing the company with some headroom to navigate its operational transition.
--While the company does not expect further declining cash flows, Fitch expects revenue, EBITDA and free cash flow to remain under pressure until print classifieds make up well under 5% of the over-all advertising revenue mix (print classifieds presently constitute around 15% of the advertising revenue mix). However, if the company can achieve sustained revenue growth, margin expansion and reduced leverage, there could be positive implication to the ratings over time.
--Although Fitch expects the pace of revenue declines to decelerate in the intermediate term, the evolution of advertiser behavior and consumer media consumption habits will provide an overhang to operations for the foreseeable future. Fitch believes McClatchy could remain timely in covering its interest payments. While free cash flow may be sufficient to cover a portion of its 2013 maturity, Fitch does not expect McClatchy to generate enough free cash flow to pay off its debt maturities in 2014 or beyond. Given Fitch's estimates that the company will be unable to repay principal organically as it comes due, Fitch remains concerned regarding the company's ability to refinance any meaningful future debt maturities. Given these factors, Fitch believes the company's new capital structure could still be untenable over the longer term. Fitch believes that there is a real possibility of default as a result of the company's reliance on external capital to meet maturities.
In addition to the issuance of new notes and the completion of its tender offer, the company has amended its credit agreement extending the maturities by two years for most of its outstanding balance ($73 million in outstanding balances is expected to remain due in June 2011). In addition, the banks agreed to covenant relief by reducing the previously scheduled leverage covenant step down from 7.0 times (x) to 6.25x in December 2010 to 7.0x to 6.75x in December 2010, reducing further to 6.5x in March 2011, 6.25x in March 2012 and finally 6.0x after December 2012. The interest coverage covenant was also amended to a minimum of 1.5x starting in March 2010 and stepping up gradually to a high of 1.7x after September 2012. The amendment also reduced availability under the revolver (the company expects $189 million in availability) and increased pricing on borrowings. Borrowings under the credit agreement will bear interest at a spread ranging from 425 basis points (bps) to 575 bps (based on the leverage ratio) and a 3% floor on LIBOR. The company expects to initially pay interest of 8% on its outstanding bank debt. The amendment also permitted the incurrence of the new senior secured notes.
As of Dec. 30, 2009, McClatchy's liquidity was supported by $4 million to $5 million in cash balances and approximately $189 million in revolver availability. While the company has negotiated expanded leverage covenant levels, Fitch expects leverage to be near 7x at the end of 2010, leading to a potential covenant breach. Fitch notes that McClatchy has been successful in negotiating covenant relief and would expect the company to seek an amendment prior to breaching the covenant. Leverage as of Dec. 31, 2009 was approximately 6x.
Given the increase in cash interest, potential pension funding and continued revenue pressures, offset somewhat by the elimination of the dividend (due to previous bank amendments) and the company's continued cost management efforts, Fitch expects FCF to continue to decline in 2010 and could approach break even levels.
The Recovery Ratings (RRs) and notching reflect Fitch recovery expectations under a distressed scenario. In computing recovery, Fitch continues to assume a 2.5x EBITDA multiple to calculate the distressed enterprise value for McClatchy. This low multiple reflects Fitch's belief that distress would be caused by some degree of obsolescence in the company's core business. In addition, given the trajectory of industry revenue trends Fitch's expectations that these trends may moderate but will not fully reverse, Fitch also attempts to estimate a level of sustainable EBITDA in the $200 million range in computing recovery estimates. Presently, Fitch's distressed enterprise valuation is between $400 million-$450 million. Fitch notes that the administrative claims adjustment employed in the computation of distressed enterprise value of 15% reflects uncertainty regarding the company's unfunded pension obligations. The 'RR4' rating for McClatchy's secured bank credit facility and senior secured notes reflects Fitch's expectation of 31%-50% recovery given that they benefit from a security interest in certain assets and a guarantee from materially all operating subsidiaries (providing priority over unsecured claims under a default scenario). Fitch does not distinguish between the bank debt and secured bond debt although we recognize the banks mature several years before the bonds. The unsecured guaranteed senior notes benefit from a guarantee provided by the same subsidiaries that guarantee the banks, giving it priority over the senior unsecured notes. However, the secured debt is not fully recovered, under Fitch recovery analysis, and all unsecured debt is rated 'RR6', reflecting the 0% recovery.
For further information regarding McClatchy, please see Fitch's 22 page full report, available at 'www.fitchratings.com'.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include:
--'Corporate Rating Methodology' (Nov. 24, 2009);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 24, 2009);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007);
--'Analysis of U.S. Corporate Pensions' (Sept. 24, 2007).
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Rolando Larrondo, 212-908-9189, New York
Mike
Simonton, CFA, 312-368-3138, Chicago
or
Media Relations:
Cindy
Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
