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Global Credit Research - 31 Aug 2010
Approximately $1.2 billion of rated debt affected
New York, August 31, 2010 -- Moody's Investors Service upgraded GateHouse Media Operating, Inc.'s
("GateHouse" ) Probability of Default Rating ("PDR") to Caa3
and affirmed the Corporate Family ("CFR") rating of Ca,
reflecting our view that with no financial maintenance covenants unless
there are revolver advances, which are not possible given the company's
current leverage, the company is not likely to default on its $1.2
billion term loan facilities in the next 12 months; however,
we still anticipate default and significant restructuring over the intermediate-term
horizon. Ratings on individual instruments remain unchanged.
As the CFR already reflects a likely restructuring, and the PDR
considers our view that default is not imminent, the outlook was
changed to stable. Details of the rating actions are as follows:
.Probability of Default rating -- to Caa3
Unchanged Ratings (LGD's were updated to reflect current debt structure):
.Senior secured revolving credit facility --
Ca, LGD4, 65% from LGD4, 57%
.Senior secured term loan B -- Ca,
LGD4, 65% from LGD4, 57%
.Senior secured term loan C -- Ca,
LGD4, 65% from LGD4, 57%
.Senior secured delayed draw term loan --
Ca, LGD4, 65% from LGD4, 57%
.Corporate Family rating -- Ca
.The rating outlook has been revised to stable from negative.
GateHouse's Ca Corporate Family Rating reflects Moody's view that the
company faces poor recovery prospects for debt holders in an event of
default scenario which is exacerbated by continued soft demand for print
advertising. Moody's considers the company's very highly-leveraged
capital structure to be unsustainable. Compounding a soft advertising
environment and high leverage is a constrained liquidity profile making
the prospect of an intermediate term balance sheet restructuring increasingly
likely. "The Caa3 Probability of Default Rating acknowledges that
with no financial maintenance covenants in the bank term loans (unless
there are revolver advances which is currently not the case), we
do not anticipate the company defaulting on its $1.2 billion
term loan facilities in the next 12 months; however, we still
believe that it is likely to default over the intermediate horizon,"
stated Carl Salas, Vice President at Moody's Investors Service.
Recent declines in GateHouse's sales and EBITDA have pushed the company's
debt-to-EBITDA leverage above an 11 times multiple for the
LTM ended June 30, 2010 (including Moody's standard adjustments).
We expect the company will be able to reduce its leverage only modestly
over the near term. Moody's recognizes the success of GateHouse's
initiatives to cut costs with full year benefits to be realized in 2010.
For the 12 months ending June 30, 2010, EBITDA margins of
approximately 18.3% in 2009 (including Moody's standard
adjustments) are up from 16.8% from the 12 months ending
December 2009. Nonetheless, we consider that management may
conclude that more fundamental measures, including a distressed
exchange or pre-packaged bankruptcy filing, may represent
the optimal solution to provide longer term liquidity relief while addressing
the company's untenable capital structure. If this does not occur,
given the high debt load, it is unlikely that the company will possess
the ability to refinance its debt at maturity in 2014.
GateHouse's sources of liquidity consist of cash on hand ($28 million
as of June 30, 2010) plus cash generated from operations.
Given that revolver advances require pro forma compliance with a 6.5x
total leverage ratio test (as defined), the company is not able
to request advances under its $20 million revolving credit facility.
Therefore, the company relies on balance sheet cash and internally
generated cash flow to meet near-term funding needs. There
is no scheduled amortization under the term loans; however,
the company is subject to a 50% excess cash flow recapture provision
and paid $2.5 million in March 2010 based on excess cash
flow for FY2009. The next recapture payment would be in March 2011.
In August 2008, the company issued $11.5 million of
10% preferred stock purchased entirely by FIF III Liberty Holdings
LLC ("FIF III"), an affiliate of Fortress. Over
the next five years, Fortress is able to put the preferred shares
and dividends (approximately $2.3 million) to GateHouse.
If Fortress decides to put the shares to the company, liquidity
would be reduced by at least $13.8 million. Under
an amendment to its credit agreement, Gatehouse is able to apply
cash in excess of $20 million towards non-pro rata term
loan repurchases through a modified Dutch auction through December 2011.
We would view purchases under this arrangement as a distressed exchange.
The stable outlook reflects Moody's view that, despite single
digit declines in revenue growth, GateHouse should be able to generate
sufficient EBITDA to fund working capital, interest expense and
capital spending over the next 12-18 months thereby avoiding payment
A rating upgrade is unlikely in the intermediate-term given the
projected very high leverage absent a restructuring or robust economic
expansion which would materially grow revenues and profits. Ratings
could be downgraded if the company announces plans to effect debt reduction
through a distressed exchange or a similar capital restructuring with
debt holders receiving less than par value. A downgrade would also
be likely if EBITDA or liquidity deteriorated to the point that the company
could no longer fund its operating needs or debt service.
The last rating action occurred on September 17, 2009, when
Moody's downgraded GateHouse Media Operating, Inc.'s ("GateHouse"
) Corporate Family rating to Ca from Caa1 and its Probability of Default
rating to Ca from Caa2, GateHouse's Corporate Family rating to Caa1.
The principal methodology used in rating GateHouse was that of the Global
Newspaper Industry, published in September 2008 and available on
www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
be found in the Rating Methodologies sub-directory on Moody's website.
With its headquarters in Fairport, New York, GateHouse Media
Operating, Inc. ("GateHouse") is one of the largest publishers
of locally based print and online media (newspaper and related publications)
as measured by the number of daily publications. Fortress Investment
Group LLC and its affiliates ("Fortress") beneficially own
approximately 39.6% of outstanding common stock and 10.5%
of the outstanding credit facility as of June 30, 2010. The
company recorded sales of approximately $573 million for the twelve
month period ended June 30, 2010. GateHouse publishes 87
daily newspapers, 261 weekly newspapers, 105 shoppers,
and seven yellow page directories in addition to operating over 270 locally
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service's information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's Investors Service adopts all necessary measures so that the information
it uses in assigning a credit rating is of sufficient quality and from
reliable sources; however, Moody's Investors Service does not
and cannot in every instance independently verify, audit or validate
information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades GateHouse Media's PDR to Caa3, keeps CFR at CA, outlook revised to stable
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