By Karen Brettell
NEW YORK, July 25 (Reuters) - Debt protection costs on New
York Times Co (NYT.N) are trading at record highs and, as
Standard & Poor's reviews the publisher for a possible
downgrade into junk territory, its credit spreads risk
weakening further.
S&P said on Wednesday it may cut New York Times from
"BBB-minus," the lowest investment grade, as an accelerating
pace of revenue declines indicates the company may be unable to
meet expectations baked into the investment-grade rating.
The newspaper publisher said earlier that day that its
second-quarter profit fell with a 12 percent decline in
newspaper advertising. Internet revenue rose 12.8 percent to
$91.3 million, representing about 12.3 percent of the company's
total revenue during the quarter. For details, see
[ID:nN23454228].
New York Times' ratings depend on the company being able to
grow its Internet revenue base enough that it can fully offset
declines in print revenue and earnings before interest, taxes,
depreciation and amortization over the next two years, S&P
analyst Emile Courtney said in an interview on Friday.
"The second-quarter rate of declines translated for us into
a new expectation that the base for cash flow would be lower
than our previous expectations," he said.
After the earnings, S&P is "reassessing the pace of print
declines and how that current, rapid pace of decline
complicates efforts to stabilize cash flow in the future,"
Courtney said.
New York Times' spokeswoman Catherine Mathis declined to
comment on the downgrade review.
The cost to insure New York Times debt has surged to 397
basis points, or $397,000 per year for five years to insure $10
million in debt, exceeding its previous end-of-day high of 387
basis points on March 13, according to Markit Intraday.
The swaps have weakened from 362 basis points on Tuesday,
before the earnings report.
And, as the potential downgrade weighs on its debt, spreads
are likely to weaken further.
CreditSights analyst Jake Newman changed his recommendation
on New York Times' debt to "underweight" from "overweight" on
Wednesday after the earnings release.
"We cannot keep an 'overweight' on The New York Times given
the uncertainty of how it will manage the transition to
speculative grade," Newman wrote in a report.
The newspaper publisher has drawn $370 million from a $400
million credit facility that is due in May 2009, and will
likely need to access the debt markets to refinance this, he
said.
"Liquidity will be an important test of management's
ability to operate with at least one noninvestment grade
rating," Newman said.
Moody's Investors Service rates the company "Baa3," the
lowest investment grade, with a stable outlook.
MULTIPLE SPREAD RISKS
Barclays Capital analyst Hale Holden sees five near-term
catalysts that could lead to further weakness in New York Times
debt. And, he wrote in a report, "we cannot envision a single
positive scenario and continue to recommend a short credit
position."
The potential for an S&P downgrade and the refinancing of
its credit facility could both weigh heavily, Holden said.
"While we do not expect NYT to be unable to extend the
maturity, the potential for a downgrade below investment grade,
combined with weak fundamental trends and the current tight
liquidity environment, could result in onerous terms and/or a
situation where the corporate ratings are notched," he said.
Further revenue declines and rising inflationary cost
pressures may also weigh, while possible agitation by activist
shareholder Harbinger Capital Partners, a hedge fund that owns
19 percent of New York Times' stock, could be negative for debt
holders, Holden said.
As advertising declines weigh on the entire publishing
sector, liquidity problems at a competitor could spark concerns
about the Times, and "a major newspaper failure could reset NYT
wider," Holden added.
(Editing by Jonathan Oatis)
