Fitch: McClatchy Could Bump Up Against Loan Covenants By End Of ‘09

Fitz: Credit ratings firms inevitably praise The McClatchy Co. for its aggressive cost-cutting and assiduous attention to debt -- and just as inevitably express real pessimism about its financial future.

Now comes a comprehensive 18-page analysis by Chicago-based Fitch Ratings that takes the same approach, and warns again that the outlook on McClatchy’s already-junk grade credit rating is “negative,” suggesting it could drop even farther.

Fitch’s latest report isn’t really new. As E&P reported at the time, the ratings firm in late October dropped McClatchy’s “Issuer Default Rating” to B- from B+, suggesting its debt is “highly speculative.” And it’s issued a rating on its unsecured notes and debentures -- and most of McClatchy’s $2.1 billion of debt is in those categories –- to a CCC/RR6 rating, a level indicating "default is a real possibility."

If there’s news out of this more-detailed report, though, it’s bad for McClatchy: Fitch thinks that even under the loosened covenants to its credit agreement that it negotiated in late September, McClatchy could be in deep water – and soon. Why so? See below:

EBITDA (earnings before interest, taxes, depreciation and amortization)  from the publisher of 30 papers including the Sacramento Bee and The Miami Herald is simply declining too fast, Fitch says:

The most-recent  credit facility amendment, agreed to on Sept. 26, 2008, provided greater financial  covenant flexibility over the previous amendment in exchange for an increased security  package, increased pricing, decreased capacity and additional covenant restrictions.   While the financial covenants have been amended, providing more room for  deterioration, Fitch estimates that continued declines in EBITDA could exhaust much of this capacity over the next 12 months, heightening risk of a potential covenant breach.  In addition to the declining revenues, the increased bank pricing will add additional  strain on the interest coverage ratio.

(McClatchy's policy, Fitz & Jen has been told on several occasions, is not to comment on stock or credit analyst reports.)