One-Two Punch: Gannett's Credit Rating Labeled 'Junk'

by Erik Sass, Feb 26, 2009, 4:54 PM

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In another sign of the accelerating decline of the newspaper business, Gannett Co.'s credit rating has been downgraded from investment status to "junk" status by Moody's Investors Service. With the decision, virtually every major newspaper publisher in the country is now designated "junk" for credit purposes--meaning that it will be difficult, if not impossible, for them to borrow money.

A lower credit rating typically results in a company having to pay more to borrow money.

John E. Puchalla, a senior analyst with Moody's, explained the decision: "The downgrade reflects Moody's expectation that changing media consumption habits and the heightened level of price and volume competition... will continue to erode operating cash flow." He added that the company will probably feel the effects of a "deep cyclical slowdown in advertising spending" for two years or more.

The move is especially telling because Gannett was considered to have managed its finances more responsibly than most other major newspaper publishers, including Tribune, McClatchy, Philadelphia Newspapers LLC and the Journal Register Co., which assumed substantial debts through mergers and acquisitions earlier in this decade. However, it did spend almost $3.5 billion on stock buybacks from 2004-2008, and now carries a total debt of about $3.8 billion.

This level of debt may not have seemed onerous three years ago, but the steep decline in print ad revenues means the company will have a harder time making scheduled payments to creditors. In the fourth quarter of 2008, publishing operating revenues tumbled 18% compared to the same period in 2007, from $1.7 billion to $1.4 billion. Last October, it activated a revolving line of credit worth up to $1.2 billion to make payments on its commercial debt, a sign that the company is feeling the revenue squeeze--as is every major newspaper publisher.

In fact, the only publisher that still has an investment-grade credit rating is The Washington Post Co., largely because of its profitable Kaplan education and cable TV divisions. Every other big publisher, including The New York Times Co., Tribune and McClatchy, has been downgraded to "junk" status.

Newspapers are not alone. Radio broadcasters are also facing questions about their financial arrangements in the wake of highly leveraged M&A deals last year. Earlier this week, Standard & Poor's said it was downgrading the credit rating of CC Media Holdings, the company formed by private-equity firms to take Clear Channel Communications private, lowering its credit rating from a B to a B-. The decision was motivated by growing concern that the holding company might not be able to keep up with payments on nearly $18 billion in debt assumed in the deal to take the company private last year.

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