McClatchy Cashing Debt Securities

Highlights include The McClatchy Company (MNI - Snapshot Report), The New York Times Company (NYT - Snapshot Report), Washington Post Co. (WPO - Analyst Report), Lee Enterprises (LEE - Snapshot Report), Gannett Co. (GCI - Snapshot Report) and Journal Communications (JRN - Snapshot Report).

McClatchy: Expensive Debt Exchange Offer Extends Maturities

It’s an offer bondholders can’t refuse.

The McClatchy Company (MNI - Snapshot Report) has announced an offer to exchange $1.15 billion in debt securities for cash and new notes in a move that extends its earliest maturities and lessons the threat of default -- but at a very steep price.

The publisher of 80 newspapers, including the Miami Herald and Sacramento Bee, will issue new notes, due 2014, that raise its interest rate to 15.75%, from 4.63% to 7.15% on its current debt securities, but extends its nearest maturity from 2011 to 2014.

There will be sufficient cash and new notes to repurchase all of the company’s notes due in 2011 and 2014, while the longer dated notes – maturing in 2017 to 2029 – will be prorated.

A big jump in interest rates is only one incentive for note holders to tender. Those not tendered will be subordinated to the new notes, substantially raising their risk and diminishing their value.

McClatchy also amended its bank agreement to allow it to use up to $60 million on its revolving credit facility for the exchange. In return, the bank group is reducing McClatchy’s revolving credit limit to $560 million from $600 million, and raising pricing by 50 basis points to a current rate of LIBOR plus 400 basis points.

McClatchy acquired much of its debt in its 2006 acquisition of Knight-Ridder. Over the last year, as EBITDA plummeted, McClatchy’s leverage soared to 5.9x cash flow at March 31, approaching the recently increased limit of 6.25x. Likewise, interest coverage was 2.8x cash flow, modestly above 2.0x limit at a time of shrinking cash flow.

Like fellow newspaper publishers The New York Times Company (NYT - Snapshot Report), Washington Post Co (WPO - Analyst Report), Lee Enterprises (LEE - Snapshot Report), Gannett Co (GCI - Snapshot Report) and Journal Communications (JRN - Snapshot Report), McClatchy is scrambling to cut costs and build its Internet operations. If successful at shrinking its cost structure and adapting its business model through innovation to recapture lost print ad share, MNI will emerge from the recession a leaner, more efficient and nimble hybrid print-online news provider with a portfolio of market-leading newspapers and websites.

The primary catalyst for improvement, however, is an economic upturn, and visibility to that is murky.

Shares of McClatchy soared 30% to $0.82 on the news, and are trading at double their low of $0.41 in early March, as bankruptcy fears ease. We are raising our rating to Hold from Sell on McClatchy shares on the improved likelihood of the company’s survival.

The newspaper industry was already in the midst of a secular downturn – MNI’s circulation revenue fell for the third consecutive year in 2008 (-16%) – when the economy began sinking.