UPDATE 3-Philadelphia papers owner files for Chapter 11

* Second U.S. newspaper publisher to file this weekend

* Company to continue normal operations

* Seeks court approval of up to $25 mln financing

* Royal Bank of Scotland among largest unsecured creditors

(Adds more details)

By Robert MacMillan

NEW YORK, Feb 22 (Reuters) - The publisher of The Philadelphia Inquirer and Daily News said on Sunday it filed for Chapter 11 bankruptcy protection, marking the latest milestone in a crumbling of the U.S. newspaper business.

In a statement, Philadelphia Newspapers LLC blamed its filing on a “rare trifecta of a dramatic decline in revenue, the worst economic crisis since the Great Depression and a debt structure out of line with current economic realities.”

The announcement came a day after Journal Register Co JRCO.PK, which publishes 20 daily newspapers, filed for Chapter 11 bankruptcy protection, as U.S. newspaper publishers stumble in a rising tide of debt and sinking ad sales.

Philadelphia Newspapers’ chief executive, Brian Tierney, did not respond to an e-mailed request for comment. Inquirer Editor Bill Marimow declined to comment.

Philadelphia Newspapers and Journal Register, which publishes several small papers in the Philadelphia metropolitan area, join the much larger Tribune Co, publisher of the Chicago Tribune and Los Angeles Times, in a growing line of U.S. newspaper publishers seeking bankruptcy court protection to stay afloat while they restructure.

Philadelphia Newspapers said it will continue normal operations of its newspapers, magazines and online businesses. It said the filing was made in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania.

It is seeking bankruptcy court approval of up to $25 million in debtor-in-possession (DIP) financing provided by various lenders through NewSpring Capital. The money will allow it to keep paying its workers, the company said.

“The Debtors filed these cases principally to restructure an overleveraged balance sheet, not to restructure leases, contracts or operational agreements,” the company said in its filing.

The company projected 2009 adjusted EBITDA in excess of $25 million, down from about $36 million it generated in 2008.

The company's largest unsecured creditors include Royal Bank of Scotland RBS.L, MCG Capital Corp MCGC.O, CIT Group Inc CIT.N and the Virginia Retirement System, according to the filing.

The company said it has been negotiating with its lenders for the last 11 months. In that time, it said lenders including the Blackstone Group BX.N, Drinker Biddle and Akin Gump have billed it more than $13.4 million in interest penalties.

Its operations are “sound and profitable,” it said in a statement.

This is a problem that newspaper publishers such as Lee Enterprises LEE.N and McClatchy Co MNI.N have. While they are profitable, they owe money they borrowed to buy companies and take other actions, often at a ratio to their cashflow that violates their lending agreements.

Some publishers, like Lee and McClatchy, have renegotiated their debt terms to buy more time.

The Philadelphia Inquirer and Daily News previously were owned by Knight Ridder Inc, one of the largest U.S. newspaper publishers. Smaller publisher McClatchy swallowed it up for more than $4 billion in 2006, and then sold off several Knight Ridder papers, including the Philadelphia ones.

Tierney, a veteran public relations executive who represented Philadelphia’s Roman Catholic archdiocese and had tussled with the paper over its coverage of the church, led a group to buy them for $515 million in cash.

It is the second paper that McClatchy has sold in recent years to file for bankruptcy. The other is The Minneapolis Star-Tribune, which the Sacramento, California-based publisher sold for $530 million to private equity company Avista Capital Partners.

In a January interview on the Reuters MediaFile blog, Tierney said the company was negotiating with lenders over its debt, at the time coming in at $400 million.

He also said ad revenue fell 17 percent in 2008, and total revenue fell 10 percent. He forecast a similar decline in 2009.

Many newspaper publishers are dealing with similar declines.

On a fundamental level, the erosion of the way that most papers make their money portends the possibility of more bankruptcies and raises questions about the gradual destruction of one of the basic ways that people in the United States get their news.

“Last year, we did almost $40 million EBITDA [earnings before interest, taxes, depreciation and amortization], but our debt service is $40 million also, so we’re in kind of a covenant default,” Tierney said in January.

“Some of that debt needs to be significantly restructured... But the debt story does get in the way of the audience story.” (Additional reporting by Ratul Ray Chaudhuri in Bangalore; Editing by Ian Geoghegan and Sharon Lindores)