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Rating Action:

Moody's affirms B1 CFR for tronc, Inc.; revises outlook to stable

29 Jun 2017

New York, June 29, 2017 -- Moody's Investors Service affirmed the B1 Corporate Family Rating (CFR) of tronc, Inc. and changed the outlook to stable. The action follows our view that the company's expected financial performance has reduced expected volatility, while remaining in the secularly declining industry. While we expect tronc, Inc. to continue struggling over declining print advertising demand and readership in line with its peers, the company no longer has the threat of investor activism or a hostile take-over that is has faced over the course of 2016. We expect the management team to continue to invest in growth of digital products, either organically or through acquisitions, while retaining tight controls on costs. As such, we affirm the current ratings of the company. The outlook is revised to stable.

A summary of today's action follows:

Issuer: tronc, Inc.

....Corporate Family Rating, Affirmed B1

....Probability of Default Rating, Affirmed B1-PD

....Speculative Grade Liquidity Rating, Affirmed SGL-2

....First Lien Credit Facility, Affirmed B1, (LGD3 from LGD4)

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

tronc's B1 Corporate Family Rating (CFR) incorporates the persistent pressure on the company's newspaper print advertising revenue and its moderately high leverage. While the company's leading market position and scale of each of its publications, management's focus on cost reductions and digital initiatives may partially offset the impact of the secular decline in the newspaper publishing industry, revenue remains exposed to cyclical client spending on advertising and to changing consumer media usage away from print. Debt-to-EBITDA leverage of 3.2x as of March 26, 2017, incorporating Moody's standard adjustments, remains high for the newspaper industry, restricting the company's financial flexibility in the event of an acceleration in the decline of print ad demand or extended economic weakness in key markets. The company's highly levered position is partially mitigated by a strong cash balance of over $100 million due to cash contributions by Merrick Media and Nant Capital that tronc, Inc. intends to utilize towards strategic, EBITDA contributing acquisitions, largely targeting digital content providers.

While the new management team led by Justin Dearborn set out to make substantial changes towards acceleration of digital revenue growth, the management team was partially distracted by Gannett's unsolicited offer to purchase tronc, Inc., while also addressing activist shareholder concerns. The acquisition discussions terminated in late 2016, and in early 2017, tronc, Inc. purchased all shares Oaktree Capital, a large shareholder that has been putting pressure on the company as it relates to appropriately addressing shareholder interests. The company continues to have concentrated ownership of its stock, with Merrick Media owning 27.5% of the common stock, and Nant Capital -- 26.7% of the common stock, as of the end of the first quarter 2017. Merrick Media is permitted to further increase its shareholder stake to 30% of the common stock, resulting in greater concentration and control of the company by Merrick Media, which is solely controlled by tronc, Inc.'s non-executive chairman, Michael Ferro.

Under Moody's base case scenario, we expect tronc, Inc. will generate approximately $50 million in free cash flow annually over the next 12-18 months, driven by mid-single digit percentage overall revenue declines partially offset by additional cost reductions, while maintaining leverage in the low 3x range. We expect EBITDA margins of mid-teens through 2017 (including Moody's standard adjustments). We believe the pace of newer and improved digital services will accelerate over the next 18 months as management team focuses on achieving their budgeted revenues and operating income without the diversions towards non-strategic objectives. Liquidity is good with over $160 million in unrestricted balance sheet cash as of March 26, 2017 and $105 million of availability under $140 million ABL revolver. The absence of significant debt maturities until 2019 when the ABL revolver commitment expires provides the company a few years to execute its plans to stabilize revenue and continue the transition of its print-based businesses to digital platforms.

The stable rating outlook incorporates Moody's expectation for continued high single digit percentage declines in advertising reflecting weak performance of print advertising demand and partial shift to digital media consumption and online advertising platforms. Moody's expects that tronc, Inc. will manage its cost structure to maintain debt-to-EBITDA below 3.5x. The outlook also reflects our expectation that tronc will maintain good liquidity.

Given the current challenges, we do not anticipate an upgrade in the foreseeable future. Ongoing revenue decline or its acceleration, not matched by cost reductions, economic weakness in one or more key markets, or debt financed acquisitions resulting in debt-to-EBITDA increasing above 3.75x (including Moody's standard adjustments) could result in a downgrade. Ratings could also be downgraded if liquidity deteriorates resulting in cash balances plus revolver availability being sustained below $75 million.

tronc, Inc., headquartered in Chicago, IL, operates the second largest newspaper company in the U.S. serving nine major markets with daily newspapers, including the Los Angeles Times, the Chicago Tribune and the San Diego Union-Tribune, as well as with digital media properties and niche publications. tronc, Inc. earned $1.6 billion in reported revenue for LTM period ending March 26, 2016.

The principal methodology used in these ratings was Media Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alina Khavulya
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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