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Weekly UpdatesGarnering applause from shareholders and jeers from credit-rating agencies, The McClatchy Co. on Thursday offered to buy back almost $1.2 billion of its debt at between 18 cents and 33 cents on the dollar, offering a mixture of cash and new debt. The stock market approved of the move by driving the Sacramento-based publishing company's share price up almost 60 percent, week-over-week, closing Friday afternoon at 91 cents.
The credit-rating agencies Standard & Poors, Fitch Ratings and Moody's Investors Service all downgraded their opinions of McClatchy's debt. Fitch set its ratings of McClatchy's at C, one level above default.
"In Fitch's view there are exceptionally high levels of credit risk and a real threat of bankruptcy," the ratings agency said in a statement. Additionally, the agencies took a dim view on McClatchy's plan to put buyers of the new debt ahead of owners of the old debt, meaning that if the company were to go into default, owners of the new debt would be paid back before those owning the old debt.
Fitch said the move was "coercive" and called it a "restricted default."
The Sacramento Bee, the company's flagship paper, reported that Elaine Lintecum, McClatchy's treasurer, said the offer isn't a default.
The company hopes to pay off the $1.15 billion in notes and debentures with $60 million in cash and $175 million in new bonds that it plans to issue. McClatchy wants to buy back its debts that mature in June 2011, which were issued at 7.125 percent, and those due in November 2014, which were at 4.625 percent.
The new notes are being offered at the whopping rate of 15-3/4 percent and will be due in July 2014. The cash is coming from the company's line of revolving credit, issued by its banks. That cash comes at a price, of course.
McClatchy said that it has agreed to increase its bank interest charges at least 14 percent (the payments are based on the international interest-rate standard known as LIBOR and could go higher if LIBOR goes higher) and reduce its line of revolving credit 8.3 percent by June 30, 2010.
Further, the new agreement with its banks gives McClatchy more elbow room on the so-called loan covenants, which are the fiscal rules the company must abide to avoid loan defaults.
The company said that as of last Wednesday it had $140.8 million available in its bank line of credit and that its total bank loans are about $1.1 billion.
"We believe that being able to have more flexibility in the use of our revolving credit facility will allow us to put the company in a stronger financial position to manage our capital structure through this downturn," said Pat Talamantes, McClatchy's chief financial officer, in a statement. "This enhanced flexibility is clearly a positive development."
Lintecum, the company's treasurer, told a Bee reporter that the idea is to get the old bonds out of circulation. "We see an opportunity to reduce the amount of public bonds," Lintecum said.
McClatchy took on $2 billion of debt in 2006 to buy Knight Ridder, which it bought with a mixture of cash and stock. The plan had been to use the cash flow that the McClatchy papers threw off to pay down the debt early. But McClatchy executives didn't foresee the an unprecedented ad recession (which was compounded by a real overall recession) or the structural changes about to befall the business.
As with all the other newspaper publishing companies in the country, McClatchy has struggled in recent months, with its shares on the New York Stock Exchange dropping to an all-time weekly closing low of 41 cents on Feb. 27.
In other newspaper debt news, Standard & Poors on Thursday cut its rating for The New York Times Co. one notch, from B-plus to B. The service said that the company's outlook was stable, suggesting that it would not further downgrade the company's debt anytime soon.
"Coercive"? Damn straight. But sometimes you need both a carrot and a stick. The price McClatchy is paying for the old debt is in many cases twice what it had been trading for on the open market (the carrot) and subordinating it to the new debt (the stick) makes trading in the old notes for the new ones just that much more appealing. There's a case to be made that the highly leveraged newspaper companies that have the smartest financial people may well be the ones to survive this insanity and from where I stand, the McClatchy people are looking pretty smart.
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