Standard & Poor's on Friday cut its ratings on McClatchy Co (MNI.N) deeper into junk territory and to an extremely speculative grade and said the company is likely to violate terms in its debt agreements at the end of 2009.Fitz and Jen have more: S&P Sees McClatchy Cruising Towards Default
S&P cut the newspaper publisher two notches to "CCC-plus," seven steps below investment grade, from "B." The outlook is negative, indicating a further downgrade may be likely over the next one to two years.
"The rating actions reflect our belief that McClatchy is likely to violate the total leverage covenant in its credit facilities at the end of 2009," S&P said in a statement.
"This is due to our view that total revenue could decline near 20 percent and earnings before interest, taxes, depreciation and amortization (EBITDA) could fall between 35 percent and 40 percent this year," S&P said.
When a company violates its debt covenants it is forced to renegotiate its agreement with bank lenders, which may choose to withdraw funding.
"Given our expectation for revenue and EBITDA declines in 2009, we believe McClatchy is likely to violate its 7 times total leverage covenant in the December 2009 quarter, and we are uncertain at this time that lenders would grant additional temporary relief," S&P said.
Leverage is a measure of debt relative to EBITDA.
"Even if lenders do grant relief, we would be concerned that potential leverage of 7 times or more at McClatchy would not be manageable over the long term given secular trends in the newspaper industry," S&P added. "As a result, we believe it is likely that debt at McClatchy would undergo a restructuring of some form."