US CREDIT-CDS market signals concerns about McClatchy

Tue Feb 23, 2010 4:27pm EST

 NEW YORK, Feb 23 (Reuters) - McClatchy Co has won some
breathing room with a major debt refinancing, but its credit
protection costs remain high, signaling that investors have
lingering questions about the newspaper publisher's future.
 McClatchy's (MNI.N) five-year credit default swaps
tightened 80 basis points to 859 basis points on Jan 27 when
the publisher reported encouraging fourth-quarter results and
announced an $875 million note offering to pay down bank debt
and bonds.
 The transaction reduces looming debt maturities in 2011,
leaving 2013 as the next deadline for significant debt coming
due. That will give McClatchy more time to reap the benefits of
a strong cost-cutting drive and continue its shift to online
from print revenues.
 But McClatchy's swaps have retraced all of January's
strengthening and are now 157 basis points wider than when its
refinancing was announced, at about 1016 basis points as of
Tuesday, according to data from Markit.
 "I think the market is smart enough to know that there are
some fundamental issues here and what they've done is basically
delayed the inevitable," said Shelly Lombard, analyst at
independent research service Gimme Credit.
 McClatchy has done a great job of cutting costs and
cleaning up its balance sheet, but "I think people are still
concerned and rightly so about the long-term viability of the
newspaper industry," Lombard said.
 Rating agency Moody's Investors Service is also cautious
about McClatchy's long-term future. Though Moody's raised
McClatchy's ratings after the refinancing, the agency warned
that the company's leverage is still unsustainable, creating
elevated risk of a restructuring over the long term.
 Publisher of the Sacramento Bee and Miami Herald, McClatchy
became the second-largest U.S. newspaper chain in 2006 with its
purchase of Knight Ridder Inc. But the acquisition also
increased the publisher's leverage, resulting in a downgrade to
junk status from investment grade.
 McClatchy has relieved much of the immediate pressure from
its debt load. By refinancing bonds and bank debt and extending
maturities on a credit line, the company has reduced funded
debt maturities in 2011 to $75 million from $1.05 billion,
according to Moody's.
 Some analysts also expect McClatchy to benefit from a
recovering economy, which could slow the revenue declines of
the recent past.
 CreditSights, for example, assigned an overweight
recommendation to McClatchy after its refinancing announcement.
In a report, CreditSights analyst Jake Newman said McClatchy's
results could be helped by its cost cuts of the past year and
lower newsprint prices.
 While secular trends in the newspaper industry still point
to declining revenues, "these should be more moderate than
those of the recession and, for the coming 12 months, perhaps
easier to address," Newman said.
 Lombard said she does not expect a wave of selling in
McClatchy's bonds, but neither should investors expect gains.
 Despite the fact that McClatchy's online revenues are
growing rapidly, they are still a small portion of its overall
business and are not expanding quickly enough to replace
newspaper revenue, she said.
 On the positive side, Lombard said she does not expect
McClatchy to run into problems for at least 18 months and
probably two years, and investors can collect their coupons
until then.
 But if revenues are still declining as the economy
recovers, "you've got a lot more uncertainty than people are
factoring in even now," she said.
 (Reporting by Dena Aubin; Editing by Dan Grebler)