On the revenue side, McClatchy's revenue is declining at a 20% clip. One year ago, sales for the March 2008 quarter were $488 million. They are estimated at around $390 million for the current quarter. That is a massive drop of $100 million -- about 20% -- for the quarter compared to last year. Revenue for the current quarter is down 20%. Given the recession and the decline across the newspaper industry, experts see no hope in the near term: Alan Mutter says newspapers will see a 17% drop for the rest of 2009.
McClatchy has seen growth in online revenue, but not nearly enough. Gary Pruitt said this week McClatchy will make $200 million in online revenue this year -- that's nice, but what Pruitt didn't say is that amount won't come close to making up for the collapse in non-online revenue.
What does this mean for McClatchy's debt? Last fall McClatchy renegotiated terms with lenders, loosening restrictions to permit the company to carry more debt relative to its income (7x debt coverage). Under terms of the agreement, McClatchy could be forced to repay all its loans immediately if the leverage covenants are breached.
Under the 2008 agreement, McClatchy has mortgaged almost everything that can be mortgaged:
"Substantially all of the Company’s subsidiaries (as defined and expanded in the September 26, 2008 amendment to the Credit Agreement) have guaranteed the Company’s obligations under the Credit Agreement. The Company has given a security interest in assets that include, but are not limited to, intangible assets, inventory, receivables and certain minority investments as collateral for the facility. In addition, the amendment added various requirements for mandatory prepayments of bank debt from certain sources of cash; added limitations on cash dividends allowed to be paid at certain leverage levels; and added and amended other covenants including limitations on additional debt and the ability to retire public bonds early, amongst other changes."Which means the company has no ability to borrow more money. And, McClatchy will need to get permission from lenders before it sells any other assets.
McClatchy has a small amount of cash in the bank. (Details here.) To manage affairs, MNI uses a line of credit with the banks. If MNI violates the debt covenants, that money may disappear.
McClatchy could easily be below the new limits by the end of this quarter, triggering a technical default.
The bad news: March's 1,400 layoffs and other cost reductions were made to simply get the company through the end of the quarter (March 31), not to prepare for continuing 17% - 20% shrinkage projected by Alan Mutter and other analysts. The 1,400 was a minimal number, not nearly enough to address the company's dire situation. As revenue continues to fall, McClatchy will be forced to make more cuts to control costs to stay within the debt agreement.
So what will happen if and when MNI violates the debt covenants at the end of the quarter? Since the company's current 7x level is already risky, don't expect lenders to let this go on much longer.
Look for another round of layoffs in June. Look for asset sales. Expect McClatchy to sell buildings and lease them back. And as more employees are laid off, the value of the product becomes degraded, causing more subscribers to bail. McClatchy's situation might very well be irreversible.
(Thanks to a reader who sent a lot of this information to me.)
UPDATE: from comments:
McClatchy has less than $5 million in the bank and $129 million available on their line of credit.This company is riding on the edge living day to day on their credit card with the banks..