McClatchy Starts $1.15B Private Debt Exchange Offer

SAN FRANCISCO — McClatchy Co. is offering to buy back $1.15 billion in debt at a steep discount, a proposal that presumes the newspaper publisher's unsecured lenders will accept a fraction of the amount they are owed rather than risk getting even less if the company were to seek bankruptcy protection.

If the debt swap outlined Thursday works out, McClatchy could whittle about $900 million from its outstanding debt of about $2 billion.

The plan offered some hope that McClatchy will be able to ride out the worst recession since World War II without resorting to Chapter 11 bankruptcy protection _ a refuge already sought by at least seven U.S. newspaper publishers since December.

McClatchy shares jumped 28 cents, or 45 percent, to 91 cents in Thursday's afternoon trading.

But the publisher of The Miami Herald and 29 other daily newspapers remains on shaky ground.

"There are exceptionally high levels of credit risk and a real threat of bankruptcy," Fitch Ratings said in a note that lowered McClatchy's debt rating Thursday.

McClatchy is asking its lenders to forgive a significant amount of debt. The company is offering to pay $60 million in cash and issue $175 million in new notes to replace $1.15 billion in debt owed to its bondholders. Assuming McClatchy will be able to pay back the $175 million in new notes when they come due in 2014, the Sacramento-based company would be paying the bondholders about 20 cents on the dollar.

To entice unsecured lenders to accept its offer, McClatchy will pay a 15.75 percent interest rate on the $175 million in new notes.

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The unusually high rate and an earlier maturation are designed to appeal to holders of debt that pays interest rates of 6.875 percent and 7.15 percent and isn't due to be repaid until 2027 and 2029. Other noteholders aren't due to be repaid until 2011, 2014 and 2017 with interest rates ranging from 4.625 percent to 7.125 percent.

Based solely on the cash being paid, McClatchy is offering just 5 cents on the dollar. Even that meager guarantee could still be enough to persuade bondholders to accept because of the uncertainty facing McClatchy.

"They could decide that getting 5 cents is better than zero," if McClatchy were to seek bankruptcy protection, Fitch analyst Mike Simonton said.

Still, Simonton regards McClatchy's offer as "coercive" because the current bondholders would be thrust to the back of the repayment line if they don't accept and McClatchy has to file for bankruptcy protection. In that case, McClatchy's secured lenders, holding nearly $1 billion in debt, would be first in line to be paid. Unsecured lenders would be next in the pecking order, followed by stockholders.

McClatchy believes the debt swap "will allow us to put the company in a stronger financial position to manage our capital structure through this downturn," said Pat Talamantes, the chief financial officer. "This enhanced flexibility is clearly a positive development."

The maneuver won't change the requirement, set by its lenders, that the company's debt remain less than 7 times its annual cash flow. At the end of the first quarter, the ratio stood at 5.9.

Lowering the outstanding debt could make it even easier for McClatchy to remain in good graces with its secured lenders. But the advantage gained from the lower debt will be lost if McClatchy's cash flow continues to fall at the rate it has been during the past year.

That means McClatchy's fate may still hinge on how much further its advertising revenue drops. Like most newspaper publishers, McClatchy makes most of its money from advertising, and that has been evaporating because of the recession and a shift that has been funneling more marketing dollars to the Internet.

McClatchy's ad revenue plunged 30 percent in the first quarter after falling 18 percent for all of 2008.

Despite the severe downturn, most newspapers remain profitable on an operating basis. The publishers in the biggest trouble are those shouldering the biggest debts. McClatchy took on most of its debt in 2006 when it bought Knight Ridder.

McClatchy executives have publicly insisted the company will survive and thrive. To cope with the ad declines, McClatchy has eliminated more than 4,000 jobs, or about one-third of its work force, in the past year. It also lowered its debt by $433 million last year.

To finance the cash portion of the debt exchange, McClatchy is drawing $60 million from the revolving credit line provided by a group of secured lenders that includes Bank of America and JPMorgan Chase.

As part of the agreement giving McClatchy access to the $60 million, the limit on the company's credit line will decline from $600 million to $550 million during the next 13 months. Just under $141 million is still available under the credit line.

Comments

[wforvendetta]

Too sad. McClatchy was virtually alone in its questioning of the justification of the Iraq war. And insolvency is their reward.