Tribune Co. (TRB) recently announced weak year-end operating and financial results. While the company's performance is accommodated within TRB's 'B-' Issuer Default Rating (IDR) and Negative Outlook, Fitch notes that EBITDA deterioration combined with limited debt repayment has exhausted much of the room within the rating.
On a comparable basis, in the fourth quarter of 2007, publishing revenue was down 7%, costs were flat and operating cashflow was off 30%, reflecting the significant operating leverage in the business as cost cuts have not been able to compensate for the revenue deterioration. Advertising revenue was under pressure across advertising categories with classifieds continuing to post double digit declines (over 30% for real estate classifieds). Interactive revenue was up only 6%. On the broadcasting side, revenue was also down 7% while costs were up and operating cash flow decreased 27%.
TRB management has taken steps that Fitch believes may bode well for the longer term health of the company by bringing in new leadership, communicating directly with the staff and experimenting with new revenue streams. While these actions appear prudent, they are less quantifiable in the near term and they may not produce results that address the company's currently strained financial flexibility.
While the drop in interest rates has helped create some room around the interest coverage covenant of 1.15 times (x), TRB has limited flexibility around its 9.0x senior secured leverage covenant. Fitch calculates the ratio to be around 8.0x at year end and if trends from the fourth quarter 2007 continue or accelerate in the first half of the year (absent additional cost or debt repayment actions), the company could be at risk of breaching the covenant threshold. Fitch notes, this covenant steps down in the first quarter of 2009 to 8.75x, further pressuring flexibility around the covenants.
Cost cuts announced and implemented in the first quarter should help somewhat, but Fitch notes that more action may be necessary to offset the rapid erosion of circulation and advertiser dollars. In 2008, Fitch will continue to focus on revenue trends and adequacy of cost cuts. Also, Fitch expects TRB to pursue asset sales to enable it to address year-end principal amortization on the tranche X of its term loan facility. The terms of the tranche X heighten refinancing risk as $650 million comes due by year-end 2008 with the remaining principal ($750 million) coming due mid-year 2009. Fitch expects these payments could be satisfied with asset sales, including the sale of the Chicago Cubs franchise and TRB's 25% stake in Comcast SportsNet Chicago.
Fitch's ratings reflect TRB's significant debt burden, as well as the decline in its revenue and cash flow. Fitch believes newspapers and broadcast affiliates (particularly in large markets where there is more competition for advertising dollars) face meaningful secular headwinds that could lead to more cash flow pressure in the future. In addition, the ratings continue to reflect volatile newsprint prices and the threat of emerging technologies on the economics of the pure-play broadcasting affiliate business (especially for its lower rated CW stations). TRB's businesses face the risk of margin compression as revenue pressures are coupled with cost structures that are fixed or contain elements that are largely outside of management's control. There is a limited margin of safety around the bank facility covenant thresholds to endure these threats in a cyclical downturn. These concerns are balanced somewhat by the geographic diversity of the company's assets as well as the success of several of the company's on-line investments. Liquidity is supported by availability under its $750 million revolving bank credit facility which is fully available (with the exception of $65 million in letters of credit). Also, TRB owns some valuable assets (L.A. Times, Newsday, Chicago Cubs, Food Network stake, etc.) that are separable from the company. Cash proceeds from core divestitures would not likely de-leverage the company but could provide some capacity to enhance liquidity.
Fitch rates Tribune as follows:
--Issuer Default Rating (IDR) 'B-';
--Senior secured revolving credit facility 'B/RR3';
--Senior unsecured bridge loan 'CCC/RR6';
--Senior unsecured notes 'CCC/RR6';
--Subordinated exchangeable debentures due 2029 'CCC-/RR6'.
The Rating Outlook remains Negative.
For further information see Fitch's press release 'Fitch Downgrades Tribune's IDR to 'B-'; Outlook Negative' dated Dec. 20, 2007, available on the Fitch Ratings web site www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.