McClatchy's trajectory to insolvency

Having slashed payroll and reduced newsprint expenses, newspapers are running out of ways to further reduce costs, and will find it harder to pay off debt, according to Alan Mutter.

A case in point is the McClatchy Co. As its sales fell 15.2% in the first nine months of this year, its EBITDA dropped almost twice as fast to 17.5% from 24.6% in 2007, wiping out $166.4 million in operating profits from one year to the next.

This sort of thing not only rattles investors on Wall Street – that’s why newspaper shares are trading at all-time lows – but also imperils a company’s ability to repay its loans on a timely basis. Foreseeing the shortfall in earnings this year, McClatchy renegotiated its loans to gain more time to repay its debt. Unless the company can stimulate its sales and radically reduce expenses, however, it, like most other publishers, could be on a trajectory to insolvency.

The bitter irony for the newspaper industry is that the desperate reductions in staffing and newshole are compromising dangerously the quality of the products that built each of its valuable franchises. The compromises, which typically dismay most loyal and discerning newspaper readers, are likely to speed the declines in circulation and sales that are the root cause of industry’s faltering profitability.