The Gannett Board of Directors will be reviewing the company’s hefty dividend next month after the company reported a down quarter and plans for a big write-down. That dividend policy is one of the things that Moody’s Investors Service will be watching after it downgraded the company’s debt rating and said a further downgrade which would move the company into junk bond territory, was possible. $1.6 billion of debt is affected.
Here’s what Moody’s had to say:
“Moody’s Investors Service downgraded Gannett Co., Inc.’s ("Gannett") senior unsecured rating to Baa3 from Baa2, and the commercial paper rating to Prime-3 from Prime-2. The ratings remain on review for further possible downgrade. The downgrade and continued review were prompted by the ongoing and deepening declines in Gannett’s revenue and Moody’s expectation that 2009 will be incrementally challenging for the company’s newspaper and broadcast operations. Moody’s is concerned that Gannett’s free cash flow, while still positive, is deteriorating rapidly from very strong historical levels despite revenue-enhancement initiatives and cost reduction efforts. Furthermore, Gannett’s traditional ability to mitigate pressure on leverage through debt reduction is diminishing as it also faces the maturity of its entire debt capital structure by April 2012. Gannett’s $5.1 – $5.9 billion goodwill, intangible and other asset impairment charge anticipated in the fourth quarter is non-cash and does not affect its covenant EBITDA, but coming on the heels of the $2.5 billion second quarter write-down is reflective of the rapid pace of cash flow erosion.
Downgrades:
..Issuer: Gannett Co., Inc.
….Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2
….Commercial Paper, Downgraded to P-3 from P-2
….Issuer Rating, Downgraded to Baa3 from Baa2
….Multiple Seniority Shelf, Downgraded to (P)Baa3 from (P)Baa2
….Senior Unsecured Shelf, Downgraded to (P)Baa3 from (P)Baa2
Outlook Actions:
..Issuer: Gannett Co., Inc.
….Outlook, Changed To Rating Under Review From Negative
In its review, Moody’s will evaluate Gannett’s dividend policy and its strategies to stabilize revenue and adjust costs to mitigate the pressure on revenue and free cash flow from long-term secular competition on advertising rates and volume and the severe cyclical slowdown in the U.S. and U.K. economies, as well as potential funding needs for the defined benefit pension plans beyond 2009. Moody’s will also assess Gannett’s plans to address the maturity by April 2012 of its $3.8 billion of outstanding debt and the effect that refinancing could have on its cost of capital. In addition, Moody’s will evaluate the level of cushion Gannett has under its 3.5x senior leverage covenant, although Moody’s believes the company will maintain compliance in 2009 assuming the dividend is reduced. Finally, Moody’s will consider any notching implications for Gannett’s senior unsecured bonds if the guarantee trigger event condition in its bank credit facilities is met.”
