• by Erik Sass  @eriksass1, June 30, 2009

Standard & Poor's Ratings Services is predicting that the McClatchy Co. will default on at least part of its debt by the end of 2009 or in early 2010, according to a note to investors released on Tuesday.

In the note S&P said it has lowered its rating for the company from "CC" to "SD" for "selective default," given concerns about several specific debt issues. The news comes just a few days after McClatchy revealed that a debt exchange had fallen considerably short of its goal. McClatchy has 30 daily newspapers, including The Miami Herald and Fort Worth Star-Telegram.

The company is most likely to default on senior unsecured notes originally issued by Knight Ridder as part of its acquisition by McClatchy in 2006. S&P lowered its ratings for these notes from "C" to "D," adding that creditors will have little or no chance of recovering some of their money in the event of default.

S&P also lowered its rating for another batch of senior notes coming due in 2014 to "C" from "CCC-." The company's secured debt got a higher ranking of "CC," with a better chance of creditor recovery in case of a default.

Last week, McClatchy revealed that it had reached agreements with creditors to exchange $103 million of old notes representing a variety of debts (coming due in 2011, 2014, 2017, 2027, and 2029) for new notes at a discount of 70% off the value of the old. The deal would also give creditors cash for some of the retired debt.

Essentially, the offer targeted creditors that were worried about the risk of default on the old notes, leveraging this concern to reduce the company's overall debt burden. But the debt exchange fell short of its original goal: McClatchy was prepared to exchange old notes representing as much as $1.15 billion of its old debt.

Still, the mere fact that creditors would accept new notes at less than one-third the value of the old notes suggests how dire the company's situation has become. S&P explained: "The downgrade of the corporate credit rating to 'SD' reflects our view that the exchange at a significant discount to the par value of the notes is tantamount to a default given the distressed financial condition of the company."

S&P also reiterated its opinion, first published in February, that McClatchy will violate its lending covenants by the end of 2009 or in early 2010; the terms of these covenants require McClatchy to maintain a ratio of earnings to debt of no less than 1-to-7.