Gannett’s credit rating cut to junk


Standard & Poor’s cut its corporate credit rating for Gannett Company by two notches, putting it into “junk” territory. Gannett slashed its dividend last week in an effort to save cash, but S&P worries about the company’s continued ad revenue decline for both its newspaper and television divisions. The corporate credit rating was dropped to BB from the previous BBB-. Even so, S&P says the rating outlook remains negative. At the same time, the rating on Gannett’s senior secured notes was dropped four notches to B+ from BBB-.

"The downgrade of the corporate credit rating reflects a worsening pace of expected decline in advertising spending in both Gannett’s newspaper publishing and broadcasting businesses due to deteriorating levels of economic activity in the U.S. and the U.K.," said Standard & Poor’s credit analyst Emile Courtney.

The analyst said the previous BBB- rating incorporated that revenue would decline about 10% and EBITDA would decline about 20% (on a pro forma basis after factoring in ShopLocal LLC and CareerBuilder investments in 2008). “We now believe that pro forma revenue could decline about 15% and pro forma EBITDA could decline between 30% and 35% in 2009,” the ratings revision stated.

S&P said its measurement of Gannett’s unfunded pension liabilities increased by a half billion dollars in 2008 due to a decline in the value of the pension fund’s assets.

“Even though Gannett’s financial profile benefits from significant discretionary cash flow for debt repayment (we expect over $500 million in 2009 after factoring in the dividend cut), we expect the company to face an extended period of cyclical pressure that will continue to exacerbate the secular shift in revenue away from Gannett’s newspaper business. We expect cyclical economic pressure throughout 2009 in both the U.S. and the U.K. that will negatively affect the company’s newspaper and broadcasting businesses at the same time. In addition, Gannett generated $118 million in Olympic and political related advertising revenue in its broadcasting business last year that will not repeat in 2009,” S&P stated.

“While acknowledging that it is difficult to estimate at this time what would likely represent a moderated pace of decline for newspaper ad revenue post-recession, we have incorporated into the current rating the expectation for a U.S. economic recovery beginning in 2010 and for newspaper ad revenue to decline in the high-single-digit percentage area in that year. We believe Gannett’s broadcasting business will benefit when the economy recovers, as well as from mid-term political advertising in 2010. Revenue in Gannett’s digital business grew 13% on a pro forma basis in 2008, and we believe this business is likely to have a long-term growth profile that compares favorably to the company’s publishing and broadcasting businesses,” the ratings agency concluded.