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Rating Action:

Moody's assigns B1 rating to new senior secured notes issued by McClatchy

28 Jun 2018

New York, June 28, 2018 -- Moody's Investors Service, ("Moody's") affirmed the Corporate Family Rating for The McClatchy Company ("McClatchy") at Caa1 and assigned B1 rating to $310 million in new Senior Secured First Lien Notes due 2026, which together with additional debt raised are refinancing existing $345 million in First Lien Senior Secured Notes due 2022. In conjunction with this transaction, McClatchy is also partially refinancing $82.1 million of its 2027 and $193.5 million of its 2029 maturing Senior Unsecured debentures into second and third lien senior secured debt (unrated, due 2030 and 2031 respectively), which together total $350.6 million in funded debt. Moody's affirmed the company's Probability of Default Rating (PDR) at Caa1-PD, and individual security ratings for the 2022 maturing First Lien Senior Secured Debt (to be withdrawn at repayment) at B1 and for 2027 and 2029 maturing Unsecured Notes issued by Knight Ridder, Inc. and assumed by McClatchy at Caa2. In addition to refinancing of term debt, McClatchy also plans to enter into $65 million ABL revolving credit facility and $35 million LC facility, maturing in 2023 (unrated), and replacing the company's existing revolving credit facility and LC facility, maturing in 2019 (unrated). The outlook remains stable and the Speculative Grade Liquidity rating is unchanged at SGL-3.

Assignments:

..Issuer: McClatchy Company (The)

. $310mm Senior Secured First Lien Notes due 2026, Assigned B1 (LGD2)

Affirmations:

..Issuer: McClatchy Company (The)

....Corporate Family Rating, Affirmed Caa1

......Probability of Default Rating, Affirmed Caa1-PD

........Gtd Senior Secured Notes due 2022, Affirmed B1 (LGD2)

....Issuer: Knight Ridder, Inc. (assumed by The McClatchy Company)

........Senior Unsecured Regular Bond/Debentures due 2027 and 2029, Affirmed Caa2 (LGD5)

Outlook Actions:

..Issuer: McClatchy Company (The)

....Outlook, Remains Stable

RATINGS RATIONALE

The McClatchy Company's Caa1 Corporate Family Rating (CFR) reflects persistent revenue pressure on the company's newspaper and print operations, reliance on cyclical advertising spending, and its high leverage including a large underfunded pension. These risks are only partially tempered by the company's good market position in local news and newly extended favorable maturity profile, with no debt maturities until 2026. We expect newspapers will continue to face growing competition with technology-driven changes in media consumption and shifts by advertisers away from print media creating ongoing pressure on revenue and margins. The company has been successful at growing its digital revenue stream, relying on programmatic advertising, excelerate digital agency and video, and expects crossover of revenue from digital sources to exceed print advertising revenue sometime in 2018. Competition for digital advertising remains fierce, and we expect overall revenues to continue declining during the next 12-18 months, as gains from digital advertising may not fully offset losses from print revenue and flat-trending circulation.

Ratings are supported by the company's plans to utilize a portion of free cash flow to continue diversifying its digital product offering and focus on incremental debt repayment. We expect debt-to-EBITDA leverage to remain high near-term as the company continues to experience declining advertising revenue. Digital advertising revenue has performed well behind a sales force restructuring (with digital-only ad-revenue contributing 36.3% of total advertising), however, it has not yet offset the declines in traditional advertising categories, with total advertising revenues down approximately 13% for trailing twelve months ending March 2018. While McClatchy maintains a commitment to reducing its debt using available cashflow and asset sale proceeds, top-line pressure on revenues remains as traditional advertising and circulation revenues continue to contribute a material, albeit declining portion of the total revenue base.

The B1 rating and LGD2 assessment on McClatchy's senior secured notes reflect the first priority claim on the assets and cash flow of the company relative to the Junior Lien term loans and unsecured notes due to the security interest and upstream guarantees from material domestic subsidiaries. The secured notes are backed 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. The notes rank junior to ABL Priority Collateral and those assets that are not part of the Notes Priority Collateral. In addition, the $35 million LC credit facility is secured by cash. As a result, we rank the $100 million of combined credit facilities ahead of the secured notes in our Loss Given Default framework. The Caa2 rating and LGD5 assessment on the unsecured and unguaranteed notes/debentures (due 2027 and 2029) reflect their effective subordination to the secured debt due to the absence of a priority lien and the structural subordination to the secured debt due to the lack of operating subsidiary guarantees.

The stable rating outlook reflects our expectation that the U.S. economy will continue to grow moderately and, despite declines in print ad revenue and investments in digital development, EBITDA margins will remain above the industry average. We expect debt-to-EBITDA leverage to remain elevated as McClatchy continues to re-align its operations towards a stronger product offering. We expect the company to continue its real estate disposition strategy, and using proceeds to repay or repurchase debt or reinvest in the business. The stable rating outlook also incorporates our expectation that McClatchy will maintain at least adequate liquidity and positive free cash flow.

McClatchy's ratings could be downgraded if liquidity or free cash flow deteriorates, there are persistent revenue declines with limited prospects for a reversal, or the prospect of a distressed exchange or other default increases.

Ratings upgrade is unlikely. Ratings could be upgraded if the company is able to stabilize revenue and EBITDA, generate free cash flow in excess of 5% of debt and, reduce debt-to-EBITDA sustainably below 6.0x (including Moody's standard adjustments). The company would also need to maintain good liquidity including a comfortable EBITDA cushion to financial covenants and an expectation that it can address debt maturities as they come due.

The McClatchy Company ("McClatchy"), headquartered in Sacramento, CA, is one of the largest newspaper companies in the U.S., with 30 daily newspapers, community newspapers, websites, mobile news and advertising, niche publications, direct marketing and direct mail services. The McClatchy family members and trusts, formed for the benefit of the McClatchy family, own approximately 32% of the economic interest in the company and control approximately 82% of voting power through a dual class share structure. Revenue for the LTM ended March 31, 2018 was approximately $881 million.

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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