UPDATE 4-McClatchy buys time with debt, credit moves

Thu May 21, 2009 5:17pm EDT

* Exchange offer to reduce indebtedness

* New debt carries higher interest rate

* Shares rise 35 percent (Adds Moody's lowering debt rating)

By Robert MacMillan and Supantha Mukherjee

NEW YORK/BANGALORE, May 21 (Reuters) - U.S. publisher, McClatchy Co (MNI.N), is changing key aspects of its debt agreements in a bid to stay afloat as plunging advertising revenue endangers its financial health.

McClatchy plans to exchange $1.15 billion worth of existing debt for cash and new debt.

The new debt comes with a higher interest rate of 15.75 percent versus about 5.0 percent to 7.0 percent on existing obligations, but allows the publisher to pay it off several years later.

McClatchy also will be able to use its revolving credit line for up to $60 million to pay off some of its debt, the company said.

The moves give McClatchy, publisher of The Miami Herald, Sacramento Bee, and more than two dozen other U.S. newspapers, flexibility to pay off more than $2 billion in debt related to its purchase of Knight Ridder Inc in 2006.

"It removes the imminent threat of running into some debt covenant trouble," said Benchmark Co analyst Edward Atorino. "Before this, I would have thought they were high on the list of [newspaper publishers] not making it. But they moved down the list a little bit."

Fitch and Moody's Investors Service downgraded McClatchy's debt ratings in response to the exchange offer, saying it will be considered a default.

Moody's Investors Service cut McClatchy's ratings, saying the debt exchange will be considered a default, while Fitch said the exchange constitutes a "restricted default" and also downgraded the publisher.

Fitch said McClatchy's lenders are dealing with "exceptionally high levels of credit risk and a real threat of bankruptcy."

"This exchange does not cause any default on our existing bonds under the indentures governing them, nor is it a default under our bank credit agreement," McClatchy spokeswoman Elaine Lintecum said.

McClatchy's shares have lost more than 90 percent of their value in the past 12 months and the Sacramento, California-based publisher received a delisting notice in April from the New York Stock Exchange because of its low share price.

The company has taken other measures to save money, including cutting more than 4,000 jobs, or about a third of its workforce. It also has cut executive pay and its dividend.

Other publishers, including The New York Times Co (NYT.N), have used measures similar to McClatchy's debt exchange to escape near-term financial trouble.

The Times borrowed $250 million from Mexican billionaire Carlos Slim at an interest rate similar to McClatchy's. The downside is that the high interest rates ensure the publishers will pay dearly several years from now.

If the advertising revenue that newspapers lost in the past several years does not return, it could amount to little more than deferring the pain.

McClatchy's debt offer could be attractive to lenders because of its high interest rates, but Fitch warned them that it views the offer as "coercive," noting that bondholders who do not exchange their debt would fall behind in line for getting their money back if McClatchy ever went bankrupt.

Separately, McClatchy will start paying sales commissions to ad agencies and emphasizing the Web instead of its printed newspapers as the destination for help-wanted ads, Chief Executive Gary Pruitt told shareholders at the company's annual meeting on Wednesday.

The commissions would let McClatchy compete with broadcasters for ad dollars.

McClatchy shares rose 22 cents, or 34.9 percent, to 85 cents on the New York Stock Exchange at mid-afternoon. (Reporting by Supantha Mukherjee in Bangalore and Robert MacMillan in New York, Editing by Saumyadeb Chakrabarty, Andre Grenon and Richard Chang)

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