Neither development was particularly surprising, but it sets the stage for even more bad news due later this week, when the Newspaper Association of America releases industry revenue figures for the fourth quarter of 2008.
Philadelphia Newspapers LLC filed for Chapter 11 bankruptcy protection on Sunday, saying it would not be able to make upcoming scheduled payments on its debt of $390 million. Most of this debt was acquired in a deal engineered by Philadelphia advertising mogul Brian Tierney to buy the Inquirer and Daily News from McClatchy for about $560 million in 2006.
The company technically defaulted on the debt, with missed payments in June 2008 and again in October--incurring $13.4 million in penalties as it tried to renegotiate its borrowing covenant. Having failed to reach an agreement with its creditors, however, the company was left with no alternative except bankruptcy protection, in the hopes of restructuring debt under the provisions of Chapter 11.
This would allow it to use a financial arrangement called "debtor-in-possession" financing with NewSpring Capital--which, as the wording suggests, will leave the company under the control of Philadelphia Newspapers.
According to Tierney, the company's CEO, the newspapers are actually "sound and profitable" on a current basis. In an email to staff, he added: "We have asked the court to permit all salary and benefits, including pensions and 401(k) plans, to continue as usual"--a significant commitment, as other big publishers are freezing pensions and 401(k) contributions.
Still, it indicates that the holding company--like other publishers that closed big deals in the last decade--underestimated the severity of both the secular decline in print ad revenues and the current recession. Tierney summed up the situation in his email: "As a company, we have been hit with a perfect storm, including a dramatic decline in total revenue, the worst economic conditions since the Great Depression and a debt structure which is out of line with current economic reality."
This was also the case at Journal Register Co., the publisher of the New Haven Register and hundreds of small-town weekly newspapers, which filed for Chapter 11 bankruptcy protection on Saturday. In its filing, Journal Register asked the U.S. Bankruptcy Court in Manhattan to allow it to cancel its stock and hand the company over to its creditors.
Altogether, the Journal Register carries about $700 million in debt, versus assets of about $600 million. After technically defaulting on its debt last year, the company has been forced to close scores of small-town weekly newspapers throughout Connecticut, Pennsylvania, upstate New York and Michigan.
Much of the blame for the company's current predicament has been tied to its buying spree in the 1990s and earlier this decade. This built a portfolio of about 300 weekly newspapers around the Northeast and Midwest, but loaded the company with a significant amount of debt as well.
Financial distress is widespread in the newspaper industry, and growing more acute week by week. Last week, the Star Tribune of Minneapolis asked a bankruptcy judge to dissolve its contract with the local printer's union, which ultimately falls under the umbrella of the International Brotherhood of Teamsters. According to the newspaper's publishers, freeing itself from the union contract would allow it to renegotiate terms with the printers, including lower wages, thus saving several million dollars a year.
Also last week, Lee Enterprises said it had succeeded in renegotiating the loan covenants governing $306 million in debt, most of which was assumed during its purchase of Pulitzer Inc. in 2005. By doing so, the company was able to pay off $120 million of debt right away; payment of the remaining $186 million has been deferred until April 2012. The terms of the new agreement are quite strict, however, raising the interest rate and putting the entire company up as collateral to secure the loans.