• by Erik Sass  @eriksass1, December 7, 2008

As financial analysts had warned for months, Tribune Co. may be preparing to file for bankruptcy protection as early as this week, according to the Wall Street Journal Web site, which reported the news Sunday evening. The Journal said the bankruptcy protection filing is still only a possibility, citing people familiar with the matter--but either way it is a telling sign of the dramatic decline of big American newspaper publishers.

Tribune carries an enormous debt of around $10.6 billion, including $7.3 billion incurred during the transaction engineered by Sam Zell to take the company private as an employee-owned business in December 2007. The company is currently negotiating with lenders to restructure its debt, but has also hired Lazard Ltd. as financial advisor for the potential bankruptcy filing.

Lazard's recent work includes a number of high-profile bankruptcy proceedings and acquisitions involving distressed properties, like the Chapter 11 bankruptcy filing by Vertis in July, and Barclays' acquisition of Lehman Bros.' North American Business in September.

The news that Tribune may file for bankruptcy is not particularly shocking, as financial analysts warned as early as March of this year that default was a possibility in view of rapidly worsening revenue trends. In the first three quarters of 2008, Tribune's total revenues were $3.2 billion--down 8% from about $3.5 billion in the same period of 2007.

So far the company has made all of its debt payments on schedule, including $888 million on the core $8.2 billion debt in the third quarter--bringing it to $7.3 billion. But in order to make the payment, Tribune had to borrow an additional $218 million--plus a $7 million fee--under a financial arrangement called a trade receivables debt securitization facility, which has an upper limit of $300 million. That leaves $75 million for future emergency borrowing. And it faces $850 million in debt and amortization payments in 2009, not to mention hundreds of millions of dollars of interest payments.

What's more, per the terms of its debt agreements, Tribune had to maintain a ratio of debt to operating cash flow of no more than 9-to-1 in 2008, based on the present and three previous quarters.

Altogether, the company's operating cash flow in the first three quarters of the year was $507.6 million, down 29% from $713.6 million in the same period of 2007. Including $214 million from the fourth quarter of 2007, and another $80 million in second quarter results from Newsday, Tribune's trailing four-quarter total is $778 million. Compared to a guaranteed debt of at least $7.3 billion, that's a ratio of 9.25-to-1, exceeding the debt covenants.

Worse yet, the ratio is set to tighten to 8.75-to-1 in the first quarter of 2009. Considering the steep downward trend in newspaper revenues in general, coupled with the developing economic crisis, Tribune's actual ratio of cash flow to debt is only likely to decrease, just as the ratio required by the debt covenants becomes more demanding.