Just a year ago, it would have been unthinkable that a major newspaper chain could miss its debt payments, But, that has now become a possibility at two of the larger public companies in the industry, McClatchy (MNI) and Journal Register (JRC). A third troubled company, The Tribune (TRB), may be private by the time it faces the same problem.
In the recent past, extending debt or getting better terms often worked. Debt-laden companies like Level 3 (LVLT) and Charter (CHTR) did a good job of it. But, with the credit markets feeling impoverished, refinancing is easier said than done.
McClatchy (MNI) took on a lot of debt to buy rival Knight-Ridder. It did sell off some properties to cut that debt, In its last 10-Q, the company listed almost $2.7 billion in long-term debt. On revenue of $580 million, MNI had operating income of $117 million. Interest expense was just shy of $50.
All of that does not sound so bad. But, in August, the company said that advertising revenue fell 9.2% and total revenue was down 8.4%. To make matters worse. online revenue fell. At most newspaper companies that is the one segment that is moving.up. The August drop was also worse than the year-to-date numbers, which means that the problem could be getting worse.
An 8% drop in revenue would have taken MNI’s revenue in Q2 from $580 million to about $533 million. If costs remained the same in the quarter, operating income would have dropped to $70 million. At that number, the margin for error on a $50 million per quarter interest load looks much worse.
Is a default in the cards? The company does have investments in unconsolidated companies. That could buy some time. But, the company does have debentures due this year.
McClatchy cannot get out from under that fact that newspaper revenues are going to keep falling, whether it is 5% per year or 10% per year. At $19.66, the stock is pennies from its 52-week low. The 52-week high was $44.95.
With the shares trading at less than 70%, some of the trouble is already built into the stock. but, perhaps not all of it.
Douglas A. McIntyre