Moody’s less gloomy about newspapers


It can hardly be called “bullish,” but at least Moody’s Investors Service has changed its Industry Sector Outlook for the US newspaper sector to “stable.” The outlook had been “negative.”

Moody’s said the outlook expresses the ratings firm’s expectations for the fundamental credit conditions in the newspaper industry over the next 12 to 18 months.

“The change to a stable outlook reflects Moody’s expectation that a cyclical recovery in advertising spending will moderate newspaper revenue declines as 2010 progresses and lead to a more stable revenue environment in 2011. Moody’s anticipates that newspaper advertising revenue will decline in an 5-10% range in 2010, but that revenue should be closer to flat toward the end of the year and in a -3% to +2% range in 2011,” the update stated.

“Newspapers will benefit from the recovery in national advertising as well as broad based improvement in advertising across most categories that is expected to accompany a decline in the unemployment rate and recovery in consumer spending. Moody’s continues to expect local market conditions to be more challenging due to the lingering effect of retail store and auto dealership closings. A pick-up in retail sales and an eventual rebound in some of the more cyclical classified advertising categories should ultimately lead to more stable industry revenue over the next 12-18 months,” Moody’s said.

According to the update, newspaper industry earnings are already stabilizing “with significant structural cost cuts leading to year-to-year EBITDA growth for most issuers.”
Moody’s said it believes cost reductions related to furloughs, incentive compensation and other more temporary measures will be reversed as the revenue environment improves. The majority of cost reductions are, nevertheless, permanent and should create favorable operating leverage with even a modest gain in revenue, the credit rating firm said in its analysis.

“Moody’s cautions that the stable outlook for the newspaper sector reflects the benefits of a cyclical recovery across all forms of advertising, and that newspapers will likely continue to lose share relative to other channels. Moreover, the longer-term pressure from advertiser shifts in spending to other media and to online channels along with pricing pressure – in classified categories in particular – will likely prompt a return to a negative sector outlook once the benefit from the cyclical snapback in advertising subsides,” Moody’s stated.

“Moody’s also notes that the stable outlook does not necessarily presage positive rating actions unless accompanied by significant de-leveraging and/or proactive debt maturity management. Moody’s continues to believe the industry cannot tolerate much leverage given the longer-term secular pressures and high sensitivity to economic cycles. To that end, newspaper operators are utilizing free cash flow to reduce debt and companies that have gone through bankruptcy have slashed debt significantly. Capital market access has improved meaningfully for the newspaper sector and is helping to alleviate liquidity pressure, but Moody’s believes the industry remains particularly vulnerable to negative shifts in investor sentiment that could impede or raise the cost of funding maturities over the next 2-4 years,” the analysis concluded.

RBR-TVBR observation: Hardly a glowing endorsement, but at least the newspaper business is no longer in a financial freefall. No doubt some of those newspaper companies would be healthier today if the FCC and/or Congress had the foresight a few years back to completely eliminate the crossownership rule. It is probably too late for that to have much benefit now, but it should still be done – just in case it could throw a lifeline to a daily newspaper or two.