Historically, a Ba2 credit will default about 4.3% of the time over a three year period. I think a Ba1 credit, which is what MNI was, defaults at about a 3.5% rate within 3 years.
Was this action taken by Moody's meant to include being a kick in the butt (a wake-up call) for McClatchy? If so, do you think that they got the message? I guess what I am trying to say is that I believe we have some serious problems at McClatchy.
A downgrade is a kick in the ass. I don't think MNI was that concerned in the first place so they don't view it as a message. Put your helmet on. This market is about to become much uglier. MNI's problems pale when compared to those of the entire financial market worldwide.
1. The debt is not supposed to go down to $2 billion until 12/08. The $200 million tax refund issn't due until q2 of 2008. The Miami land sale( if it happens )is for another $106 million after tax and it is a q3 2008 event. Who ever thought the debt would be down to $2 billion by now?
2. Debt covenant breach seems really unlikely with libor falling and the $200 million tax refund due. Interest rate on $1 billion of floating rate debt is lower than it has been in over a year. Libor looks like it may go lower. With libor down ~1% that saves MNI $2.5 million a quarter creating more covenant cushion.
3. Regarding EBITDA holding up (it was down about 2% for 2007 thru q3 of 2007)... S&P projects EBITDA for 2008 at $517 million. I feel that number is low but it could be used to calculate covenant risk. Using 2007 year end debt of $2.5 billion and year end debt of $2 billion gives average debt of $2.25 billion times debt cost of 6.5 percent (from the last 10 q) yields interest cost this year of $2.25x.065= $146 million in interest. 2.75 times $146 millon equals $402 million ... way under the $517 ebitda projected by S&P and well under the covenant... and none of that reflects libor going down 1% in last few months.
4. Regarding the creditor comments. The bond holders have no say. The beauty of MNI's financing is that they have time.
5. MNI did not pay all cash for KRI. They used 35 million share at ~$54 each. That $1.890 billion is now valued at $385 million.
Don't let me talk you off the ledge. Sell if you want and drive the price down. I am still accumulating.
I'm going to have to side with David on this one.
The debt has not been reduced to $2 billion like you were planning. Further, we have heard nothing about the likelihood of an asset sale (think fire sale) to raise cash for debt reduction.
I do not understand Ima's comment on the debt reduction -- "EBITDA holding up really well." If it was holding up that well, why was there a rating cut?
Not to bring it up yet again, but a debt covenant breach is not out of the question.
True, Goldman is behind the curve re its ratings on MNI. But ... how far behind the curve was Wall Street with respect to Enron? Sometimes its better late and right.
Think of it this way ... if MNI could issue 100 million shares of common at $12 per share, it would raise $1.2 billion dollars -- only half of the outstanding debt. Obviously, a stock issuance is fanciful, but thinking of the situation in these terms could yield the conclusion that even the creditors will come away with less than 100% on the dollar in a liquidation. Where does that leave the common?
I recognize that some potential is here if MNI could bridge the gap to a healthy real estate and auto advertiser base (that is, an economic rebound). But ... that's the point. When you massively overpay for an acquisition by leveraging your balance sheet, you can lose on the "time factor." Rephrased, MNI is running out of time.
I will say that David's comment on the dividend is wrong from the shareholders' viewpoint. These dividends may be all that the shareholders will ever get out of their MNI stock. The issue is how long will the creditors allow MNI shareholders a "preference" over diminishing cash flow? The answer is until some legal inroad (like a covenant breach) allows the creditors to start chewing on shareholder hide.
We will see what happens. The one thing that McClatchy was hoping for was that online growth would eventually outpace the revenue decline from print. But now that online growth is slowing or stalling out, that theory becomes more difficult to cling to.
With McClatchy having such a large debt burden of $2.5 billion, then need a certain size to be able to service and pay down that debt. With shrinking revenues and cash flow, it becomes almost impossible.
McClatchy is counting on selling some real estate in California in order to get debt down to $2 billion. But we havn't heard anything about that in the past 6 months. The real estate problems and credit crisis might be preventing them from getting the price they need.
McClatchy needs to eliminate the dividend. They are wasting $60 million per year on that. Those funds could be instead used to pay down debt and get some stability. Nobody expects media companies to pay 6% yields.
regarding your reasons...
1. Circulation is declining... That has been true for newspapers since the 1930s. According to S&P circulation declines for MNI will be less this year than last.
2. Pruitt does get it. Head counts are falling. How else would operating costs have fallen mid single digits in 2007... and they forecast them to fall mid single digits in 2008. You might want to listen to the media conference call on the company website.
3. Moody's downgrade of debt hurts but the EBITDA has held up really well due to the cost cutting. I think this represents your best argument.
4. Downgraded at Goldman.... this stock and many in the indusrty were down well over 50% in the last 12 months before the Goldman call. Does that indicate that Goldman is behind the curve??
December ad sales were down 5.3% in 2006. 2007 numbers are due this week with anything under a 9% fall "adjusted" for the period looking positive for MNI. The comparisons are much easier in the first 6 months of 2008.
I hope the knife keeps falling... and there could be a good chance as it appears that the consumer economy is very weak. Investor sentiment seems bearish as well.
If the debt is rated speculative, what adjective would you use to describe the stock?
The debt has worried me all along -- witness my e-mails pointing out that the debt covenants re being met by just a whisker.
MNI looks like it can turnaround in the intermediate to long-term. If, however, any debt covenants are breached in 2008, MNI will not get to the long-term without significant shareholder dilution.
MNI is a "deep value play" stock(three word adjective???). I do not believe that MNI will breach any debt covenants in 2008. But, pretend you are MNI's bank. Even if there were a breach on an interest rate coverage covenant your first course of action would be to try to make money for your bank. You would probably like to get more than libor plus 2%. So maybe you can charge libor plus 4% but if you don't offer good enough terms MNI can find another bank, or even a private equity player to take out the current bank and many of the public shares( at a premium, (Ariel won't go for less than $22 or 23)). Stay with MNI, spette... I feel you'll make plenty and the risk reward is most favorable.