Fitch Downgrades McClatchy's IDR to 'B+'; Outlook Remains Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on the Issuer Default Rating (IDR) and outstanding debt ratings of The McClatchy Company (MNI):

--IDR downgraded to 'B+' from 'BB';

--Senior unsecured notes/debentures downgraded to 'B/RR5' from 'BB';

--Senior unsecured credit facility affirmed at 'BB+/RR1';

--Senior unsecured term loan affirmed at 'BB+/RR1'.

Fitch has also assigned an 'RR5' Recovery Rating (RR) to MNI's senior unsecured notes and an 'RR1' to MNI's bank debt.

The Rating Outlook remains Negative. Approximately $2.1 billion of debt is affected by this action.

The downgrade and Negative Outlook reflect the continued top-line revenue pressure and resulting decline in EBITDA.

As of the last twelve months (LTM) ending June 30, 2008, revenues have declined a total of 11.8% (14.7% on a year to date comparison), with significant declines in nearly all the print advertising categories. Real estate and employment classified revenues have had the sharpest declines down 34.7% and 33.6%, respectively. Over the longer term Fitch continues to anticipate that MNI will be challenged to generate meaningful and consistent revenue growth and remains cautious regarding newspaper companies' prospects for capturing and monetizing the significant volume of advertising dollars that are migrating toward the internet. Fitch remains conscious that there is limited visibility regarding the likelihood, timeframe and magnitude of a potential reversal of these negative trends. LTM June 30, 2008 online growth of 7.5% has not been sufficient to make up for the accelerating declines in print advertising revenues.

While MNI continues to be successful in reducing costs, (they announced a reduction in headcount of 1,400 and partnerships with other newspapers to reduce print cost), these cost reductions have not yet been able to compensate for the revenue pressures. EBITDA margins (giving credit for one-time restructuring costs that may not be one-time going forward) continue to decline from 27% at year-end (YE) 2006 to 25.7% at YE 2007 and down to 23.7% for June 30, 2008 LTM.

While still generally comfortable with MNI's willingness to repay debt, this weakening of EBITDA and free cash flow has hindered the company's ability to meaningfully reduce leverage with free cash flow going forward. Fitch notes that MNI announced that the board of directors will discuss the dividend policy (approximately $60 million in dividend were paid in 2007).

The $2.1 billion in total debt is comprised of approximately $1 billion in bank term loans and revolver balances and $1.1 billion in notes/debentures (assumed as part of the KRI transaction). This is after the reduction of $300 in bonds through its bond tender offer and using proceeds from the sale of SP Newsprint and a tax refund. Leverage as measured by debt-to-EBITDA, was 4.2 times (x) (4.5x if the restructuring charges of $23.3 million are not added back to calculate EBITDA).

The RR and notching reflect Fitch recovery expectations under a distressed scenario. The 'RR1' rating for MNI's unsecured bank credit facility reflects Fitch's belief that 91%-100% recovery is realistic given that it benefits from an unsecured guarantee from material operating subsidiaries (providing it priority over unsecured claims under a default scenario) and sufficient estimated enterprise value in a distress scenario. The 'RR5' recovery rating for the senior unsecured notes and one notch differential from the IDR reflects that 11% to 30% recovery is reasonable due to its position in the capital structure.

Under the March 28, 2008 amendment, the credit facility was reduced by $250 million, from its original capacity of $1 billion. In May 2008, it was further reduced by $125 million, as a result of the tax refund received due to the sale of the Minneapolis Star Tribune. The amendment also included a condition that upon the closing and receipt of the proceeds from the Miami Property sale, the credit facility will be reduced by an additional $125 million, resulting in a total revolving credit facility of $500 million.

MNI also amended its financial covenant ratios on March 28, 2008, providing covenant and step down relief, in exchange for a decrease in the size of the revolving credit facility and increased pricing. The financial leverage covenant will remain at 5.0x total debt LTM EBITDA through Sept. 27, 2009; it will then step down to 4.75x from Dec. 27, 2009 through Dec. 26, 2010 and down to 4.5x after Dec. 26, 2010. The interest coverage ratio step up from 2.75x to 3.0x starting on Dec. 28, 2008 was also removed. Fitch calculates that interest coverage is approximately 2.9x as of LTM March 30, 2008. Given that there is limited room under these covenants and the continued pressures on EBITDA, MNI stated it would monitor its financial position and may seek further amendments. Although management has stated its good relationships with its banks, Fitch remains cautious regarding companies that may need to renegotiate with lenders in this environment.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.