UPDATE 2-McClatchy gets breathing room with credit agreement

(Adds background on credit rating, stock price)

By Robert MacMillan

NEW YORK, Sept 26 (Reuters) - McClatchy Co (MNI.N) said on Friday it has amended a credit agreement with its lenders, something that would help the U.S. newspaper publisher avoid defaulting on its debt.

The agreement covers $1.18 billion in debt, much of which stems from its purchase of Knight Ridder Inc in 2006.

It is the latest in a series of moves by McClatchy, which publishes papers including the Sacramento Bee and Miami Herald, to cut costs and strengthen its financial position as it deals with a severe downturn in advertising revenue that is the lifeblood of most newspapers.

"I think that the bottom line is that as we looked to 2009, we did not know what the economy was going to bring -- what the financial crisis was going to do," spokeswoman Elaine Lintecum said.

The crisis on Wall Street could have further impact on McClatchy as credit markets dry up, but the company was already suffering from a downturn in the real estate market and the resulting dropoff in advertising.

McClatchy and other U.S. newspaper publishers also are hurting as fewer people buy their printed newspapers and opt for the Internet instead.

The company recently cut its dividend and is reducing its workforce by about 20 percent.

Concerns about McClatchy's prospects have caused investors to push down its stock price by 77 percent in the last 12 months, and major ratings agencies have cut its credit rating into junk status.

The credit agreement says that McClatchy can increase its ratio of debt to cashflow to 6.25 times through the quarter ending in December 2008. That covenant stands at 5 times cashflow now, Lintecum said.

This is important because even as McClatchy pays off debt, the amount of money it brings in is falling because of a severe downturn in advertising revenue in some of its key markets.

The less cash the company brings in, the harder it becomes to meet its debt obligations.

It is hard to say how close McClatchy could be to tripping its current covenant because the company does not make public its cashflow numbers.

Moody's cut the company's credit rating on Sept. 17 but projected that it had enough free cash flow to meet obligations during the next 12 months.

The ratio rises to 7 times cashflow for the quarter ending March 2009 until the quarter ending in September 2010. It falls to 6.25 times after that.

The agreement also lowers the interest coverage ratio covenant to a minimum of 2.25 times cash flow through the quarter ending December 2008, and drops it to 2 times cashflow after that.

In addition, the agreement limits the amount of cash dividends McClatchy can pay.

McClatchy's shares rose 11.1 percent to $5.00 in after-hours trading, after closing up 5.88 percent at $4.50 on the New York Stock Exchange. (Reporting by Robert MacMillan; Editing by Ted Kerr)