Moody’s Investors Service has downgraded the senior debt rating of Gannett Company. The emphasis, of course, was on declining ad sales in the newspaper business, but Moody’s is also looking for Gannett’s TV group to suffer a 15-20% revenue decline in 2009. Newspaper revenues were down over 14% in Q3 and Moody’s expects that trend to continue at Gannett.
Here is what Moody’s had to say about the nation’s largest newspaper chain:
“Moody’s Investors Service downgraded Gannett Co., Inc.’s ("Gannett") senior unsecured rating to Baa2 from A3 and affirmed its Prime-2 commercial paper rating. The rating actions conclude the review for downgrade initiated on July 17, 2008. The downgrade reflects the ongoing competitive pressure on newspaper advertising revenue, exacerbated by the current cyclical newspaper and television advertising slowdown in the U.S. and the U.K. Moody’s expects that Gannett’s ongoing efforts to reduce costs and debt will not fully offset what is likely to be a deeper revenue decline in 2009 than in 2008. Moody’s is concerned that the weakened level of free cash flow will diminish Gannett’s traditional ability to sustain flat to declining leverage in economic downturns through debt repayment. Moody’s anticipates operating results will improve somewhat in 2010 as the advertising cycle begins to turn, but credit metrics will likely remain weak for the Baa2 rating until a definitive economic recovery takes hold.
The negative rating outlook reflects Moody’s expectation that earnings erosion will lead to deterioration in credit metrics to levels that are weaker than anticipated for the Baa2 rating in 2009. The rating could be downgraded further if secular revenue pressure or a deep or extended economic downturn sustains credit metrics at these weakened levels or the margin of compliance with its credit facility covenants declines.
Downgrades:
Issuer: Gannett Co., Inc.
Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from A3
Issuer Rating, Downgraded to Baa2 from A3
Senior Unsecured Shelf, Downgraded to (P)Baa2 from (P)A3
Multiple Seniority Shelf, Downgraded to (P)Baa2 from (P)A3
Outlook Actions:
Issuer: Gannett Co., Inc.
Outlook, Changed To Negative From Rating Under Review
Moody’s expects the percentage decline in Gannett’s revenue will deepen in 2009 with newspaper advertising falling at rate similar to that experienced in Q3-08 and television broadcasting revenue falling in a 15-20% range in part due to the normal reduction in political advertising in off election years. Gannett’s aggressive cost cutting programs and a potentially more favorable newsprint pricing environment should offset some of the revenue loss, but Moody’s nevertheless anticipates EBITDA will decline by 25-35%. In Moody’s opinion, Gannett would likely reduce its dividend and investment levels in response to that type of revenue environment and free cash flow is anticipated to be in a $300 – $450 million range.
Moody’s believes Gannett is partially reliant on its $3.15 billion of total external committed revolver capacity (reduced from $3.93 billion per the October 2008 amendments) to cover its $750 million of refinancing needs in 2009, which consists of a floating rate note maturing May 26, 2009. The revolver commitments further step down to $2.75 billion upon the earlier of a capital raise or 12/31/09. Because Gannett has no note maturities in 2010 and the revolvers expire in March 2012, Moody’s anticipates Gannett will have sufficient bank commitments to cover its refinancing needs over the next two years. The facilities are supported by strong and diverse bank groups, are available on a same day basis and do not contain a material adverse change clause. Moody’s believes these features greatly enhance the company’s ability to access the facilities in periods of economic and financial market stress or to fund unanticipated cash needs, subject to compliance with financial covenants.
The October 2008 amendment eliminated the $3.5 billion minimum shareholders equity covenant and replaced it with maximum 3.5x senior debt-to-EBITDA and 4.0x total debt-to-EBITDA covenants. Moody’s estimates Gannett will be at approximately 2.4x on the senior debt covenant for FY 2008 and that it will maintain moderate cushion over the next 12 months. However, a dividend reduction or scaled back acquisition/share repurchase activity might be necessary to sustain compliance if the advertising market weakens considerably. The credit agreement does not reduce EBITDA for non-cash charges such as impairments (cash payments for severance or other charges reduce EBITDA in the period paid, not when the charge is booked), providing flexibility to the extent Gannett has to record write-downs of its sizable $9 billion of goodwill and intangibles.”
