Approximately $1.6 billion of debt instruments affected
New York, November 29, 2012 -- Moody's Investors Service changed The McClatchy Company's (McClatchy)
rating outlook to stable from positive, affirmed its Caa1 Corporate
Family Rating (CFR), and assigned a B1 rating to the company's
proposed $750 million senior secured first lien notes due 2022.
The rating outlook change reflects Moody's expectation that ongoing revenue
pressure on newspapers will make it challenging for McClatchy to reduce
its very high leverage even assuming the company continues to apply its
free cash flow to reduce debt. Moody's views the leverage
as unsustainable over the longer-term, although a favorable
maturity profile creates low near term default risk.
McClatchy plans to utilize the net proceeds from the note offering to
refinance a portion of its existing first lien notes due 2017 ($846
million outstanding at 9/23/12) and fund transaction fees and expenses,
including a significant redemption premium. The transactions reduce
refinancing risk and extend the company's already favorable maturity
profile. The modest expected reduction in cash interest expense
and the added liquidity from the new $75 million super priority
five-year revolver are also credit positive. The incremental
debt will nevertheless increase leverage.
Assignments:
..Issuer: McClatchy Company (The)
....Senior Secured Regular Bond/Debenture,
Assigned a B1, LGD2 - 21%
Outlook Actions:
..Issuer: McClatchy Company (The)
....Outlook, Changed To Stable From
Positive
RATINGS RATIONALE
McClatchy's revenue continues to decline notwithstanding a modest
rebound in economic activity and a recovery in advertising in most other
media channels. There continues to be low visibility on the magnitude
and timing of any recovery in newspaper advertising, which would
depend on the strength of the overall advertising market as well as the
changes in media consumption trends. Tepid economic recovery,
and a potentially soft broader advertising market in 2013, will
likely hamper recovery for the newspaper industry. Over 2013-2014,
Moody's expects McClatchy to experience sustained declines in print
advertising and circulation, mitigated but not fully offset by growth
in digital advertising and new revenue initiatives such as increases in
subscription prices to cover bundled print-digital access,
as well as other new digital and direct marketing products.
McClatchy continues to aggressively manage costs and is benefiting from
significant cash distributions from its equity investments, which
have helped to limit EBITDA erosion. Moody's nevertheless
believes the company will find it increasingly difficult to offset revenue
declines with cost cuts while supporting both print and digital distribution
platforms and investing in its growth opportunities. As a result,
Moody's expects McClatchy's EBITDA to decline in a mid to
high single digit percentage range annually through 2014.
McClatchy's Caa1 CFR reflects the revenue pressure on the company's newspaper
and print operations, reliance on cyclical advertising spending,
and its very high and unsustainable leverage including a large underfunded
pension. These risks are only partially tempered by the company's
good market position in local news, positive free cash flow,
and a favorable maturity profile that diminishes near-term default
risk. Moody's expects newspapers will continue to face growing
competition with technology-driven changes in media consumption
and shifts by advertisers away from newspapers creating ongoing pressure
on McClatchy's revenue and margins. McClatchy is likely to
face a broader number of competitors with its initiatives to grow digital
revenue and expand products such as direct marketing, and that gains
will not fully offset declines in its print newspaper revenue.
Generating sufficient free cash flow to repay enough debt to offset earnings
declines and reduce the company's high debt-to-EBITDA
leverage (approximately 6.3x LTM 9/23/12 incorporating Moody's
standard adjustments and cash distributions from equity investments in
EBITDA) will be challenging, and Moody's believes a restructuring
over the longer-term is likely absent a significant reduction in
leverage. This is the primary driver of the Caa1 CFR.
The proposed note offering is conditioned on completion of a concurrent
tender offer and consent made to existing 2017 secured note holders.
The proposed notes will be guaranteed by each material domestic subsidiary
and secured by a first lien on essentially all tangible and intangible
assets (except Principal Properties and stock of subsidiaries as defined
in the unsecured note indentures) and share ratably in the proceeds of
any collateral sale with the existing 2017 secured notes. The proposed
$75 million credit facility is secured by the same first lien collateral
but would receive proceeds from the disposition of the collateral prior
to any distribution to the proposed 2022 and 2017 secured notes.
As a result, Moody's ranks the credit facility ahead of the
secured notes in the Loss Given Default framework. The security
package is not an all asset pledge, but Moody's is not using
a deficiency claim in the Loss Given Default framework as the guarantee
and collateral package (including guarantees from subsidiaries holding
certain minority investments) is expected to provide sufficient coverage
of secured debt in the event of a default given the more modest secured
leverage (approximately 2.75x as of 9/23/12 pro forma for the proposed
transactions).
McClatchy's SGL-2 speculative-grade liquidity rating reflects
its good liquidity position for the next 12-15 months with sufficient
cash (approximately $15.7 million as of 9/23/12) and EBITDA
generation to fund interest, taxes, pension contributions,
capital spending and other cash needs. Moody's expects McClatchy
will generate roughly $100 million of free cash flow over the next
12 months, with undrawn capacity on the $75 million revolver
(after factoring in $38 million letters of credit) providing modest
additional liquidity support. The company has no debt maturities
until November 2014, and Moody's expects McClatchy's EBITDA
cushion within its revolver financial maintenance covenants will exceed
20% over the next 12-15 months based on the covenant definitions
in its proposed revolver.
The stable outlook reflects Moody's expectation that the U.S.
economy will continue to grow modestly, that McClatchy's revenue
and EBITDA will continue to decline, and that debt-to-EBITDA
leverage will remain above 6.0x. The stable rating outlook
also reflects McClatchy's good near-term liquidity position leading
to low default risk over the next two years, continued positive
free cash flow generation and ongoing plans to reduce debt. Moody's
expects the rating outlook would be stable if the proposed refinancing
is not completed.
Greater revenue stability such that the company can sustain and grow EBITDA,
sustained positive free cash flow in excess of 5% of debt,
and debt-to-EBITDA sustained below 6.0x could result
in an upgrade. The company would also need to maintain a comfortable
liquidity position including good covenant cushion and an expectation
that it can fund or refinance maturities as they come due.
Heightened risk of a restructuring, meaningful erosion of free cash
flow, persistent revenue declines with limited prospects for a reversal,
or a weakening liquidity position caused by a declining margin of compliance
with credit facility covenants or insufficient cash and cash flow coverage
of interest and approaching debt maturities could result in a downgrade.
Please see the ratings tab on McClatchy's issuer page on www.moodys.com
for the last credit rating action and the rating history. Please
see the credit opinion on www.moodys.com for additional
information on McClatchy's ratings.
The principal methodology used in rating The McClatchy Company was the
Global Publishing Industry Methodology published in December 2011 and
the Global Cable Television Industry published in July 2009. Other
methodologies used include Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009. Please see the Credit Policy page
on www.moodys.com for a copy of these methodologies.
McClatchy, headquartered in Sacramento, CA, is the third-largest
newspaper company in the U.S., with 30 daily newspapers,
community newspapers, websites, mobile news and advertising,
niche publications, direct marketing and direct mail services.
McClatchy also owns McClatchy Interactive and holds equity investments
in CareerBuilder, Classified Ventures, and other newspaper
and online properties. Revenue for the LTM ended 9/23/12 was approximately
$1.2 billion.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the rating are the following :
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
John E. Puchalla
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's changes McClatchy's outlook to stable; assigns B1 to proposed secured notes
