Right now, all eyes are on Tribune Co., which carries a vast debt of almost $12.8 billion, about two-thirds incurred through its recent acquisition by Sam Zell. Servicing the debt requires payments of around $1 billion in 2008, and so far, Zell has made ends meet through asset sales and an aggressive cost-cutting strategy.

This year, the company has raised $121 million with the sale of a Hollywood studio and $650 million with the sale of Newsday to Cablevision; the Chicago Cubs baseball team and historic Tribune Tower in downtown Chicago are also on the block. On the cost-cutting side, management announced a new 50-50 policy, whereby its newspapers will contain no more than 50% editorial content, allowing significant staff reductions.

But even stringent measures will prove futile if the situation worsens. According to Ken Doctor, an analyst with Outsell Inc., the schedule for Tribune's debt payments was drawn up in 2007 in accordance with forecasts that looked reasonable at the time, but turned out to be too optimistic now. "We're really seeing a couple trends coming together," Doctor explained: "Circulation began falling at a faster rate of 2% to 3% a year back in 2004-2005; now, over the last year, we've begun to see revenues migrating from print to online at an even faster rate, and the real coup de grace, delivered in the last nine to 12 months, is the economic downturn as a result of normal cyclical activity."

Indeed, Zell told employees of The Baltimore Sun that his team originally assumed an overall revenue decline of 2% to 3% for 2008, but in the first quarter of 2008, total revenues fell 8% to $1.1 billion. And it doesn't help that Tribune's previous management apparently overestimated cash flow in 2007 by up to 20%, skewing any forecast for 2008 based on year-to-year comparisons.

At this rate, Tribune may default on its debt sometime in 2009, according to financial analysts with Goldman Sachs and Fitch Ratings. Default could be declared even earlier than that, per the terms of its bond covenant, which requires the company to maintain a ratio of cash flow to debt no less than 1-to-9. That means it must generate cash flow of about $1.1 billion in 2008, but this goal looks increasingly unrealistic, considering that cash flow in the first quarter of 2008 fell 16% to $200 million.If the rest of the year goes the same way, the company will generate total cash flow of just $970 million.

Penury Loves Company

Tribune's woes simply reflect broader trends in the newspaper industry. In June, the owners of The Philadelphia Inquirer and Philadelphia Daily News missed a scheduled payment on part of the roughly $500 million debt incurred in their highly leveraged acquisition of the papers in 2006; specifically, Standard & Poor's said Philadelphia Media Holdings, the consortium representing the owners, missed a payment on $85 million owed to the Royal Bank of Scotland. To give the company breathing space, some lenders suggested a temporary agreement that would, in effect, add missed payments to its debt burden, rather than turning over cash flow that's needed to reinvest and maintain current operations.

But this might not be a viable, even as a short-term solution, because PMH's revenue decline is almost certain to continue. The underlying structural factors remain the same everywhere: Big metro dailies have been losing revenue to the Internet, beginning earlier this decade with classified listings, then extending more recently to national and retail display advertising. Seeking to adapt, newspapers have had some success building online ad revenue, but this isn't growing nearly fast enough to offset losses in print ad revenue. Even worse, the print losses are accelerating, as Internet revenue growth has slowed.

As Tribune and PMH show, the problem is especially acute at companies that ran up debts in leveraged transactions. Here, McClatchy is also feeling the heat, as it struggles to service the debt it incurred acquiring Knight Ridder in 2006. McClatchy has yet to miss a debt payment, but at almost $2.4 billion, the sheer amount of debt, together with declining revenues, have prompted credit rating firms to lower their ratings several times this year.

In the first quarter of 2008, McClatchy's revenues fell 13.8% to $488 million, compared to the same period in 2007, while first-quarter interest expenses of $42 million ate up a large part of operating income of $57 million -- down 35% from $87 million in the first quarter of 2007.

As with Tribune, some analysts have questioned McClatchy's long-term ability to service the debt if revenues continue to fall. To restore the confidence of lenders and investors, McClatchy recently announced it would undertake another round of aggressive cuts, eliminating a total 1,400 positions through a combination of attrition, voluntary buyouts and layoffs. Over the last year, the company has also paid down its debt by selling properties like the Minneapolis Star Tribune and SP Newsprint Company.

Selling the Farm?

But these asset sales raise a natural question: is selling revenue-producing properties really the best way to pay off debt? The question is most pressing at Tribune, where the financial situation is most dire, and Zell finds himself having to sell key assets he never intended to part with. As recently as December 2007, he vowed not to sell the Chicago Cubs and Wrigley Field, but accelerating losses in publishing revenues have forced him to retreat.

While praising some of Zell's moves so far, including the sale of Newsday to Cablevision at a premium, Doctor said further sales could sacrifice Tribune's core business in exchange for short-term security. Here Doctor noted that the Los Angeles Times is widely considered a prime candidate for sale, as its poor financial performance has been a drag on Tribune's profits in recent years. But "the newspaper still produces a significant percentage of cash flow of Tribune, and if they do manage to sell it, that's going to fall off the table."

Looking to the future, Doctor said that "selling the Food Network, the Los Angeles Times, the Chicago Cubs, would buy them a certain number of months in each case--but it doesn't provide a long-term strategy." Bottom line: when an industry continues to lose market share and lose revenue, it's tough to pay off debt.