Wednesday, April 8, 2009

Look for another round of layoffs at McClatchy in June... company is on verge of violating debt covenants

Despite well-publicized cost-cutting measures taken last month (1,600 layoffs, wage cuts for remaining employees, mandated furloughs for many employees, and suspension of matching retirement contributions), a look at revenue projections and McClatchy's debt requirements shows McClatchy may be on the verge of violating debt covenants by June 30 -- which could trigger another round of layoffs and a sell-off of major assets.

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.


Anonymous said...

Don't worry. All the seniors will bail them out. After all, they all need MNI to get their public notices.

And since they emulate that power house Cuba, which they tell us is a better regime than ours, MNI will rise like the phoenix.

I belive MNI (wink, wink)

Anonymous said...

Another key issue is the Miami land sale. According to the SEC filing, McClatchy has to use all of that money ($125 million after taxes) to pay down their line of credit.

Oh, but there is a catch. As soon as the $125 million is paid to the banks, the banks REDUCE the overline of credit by $125 million.

That is the same as if your credit card VISA/MC was lowering your credit limit as you pay it down. Do you think your credit card company does that casually? NO. They do it because they think YOU ARE GOING BANKRUPT. They don't want any more exposure to your financial disaster.

Anonymous said...

Who pays for the shipping of ALL MNI printing presses to third world countries in June?

I think it's all a Cuban conspiracy to get MNI's printing presses on the cheap?

Anonymous said...

Also, 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.

JAT said...

The thing I do not understand is refusing to step down from daily print runs in SOME markets where it might make sense and save money.

Anonymous said...

This was a well written article. I believe what needs to happen is that each newspaper needs to have its own separate balance sheet and it is cannot show that is can sustain profitability they either need to close or be sold.

I work for one of the few profitable newspapers in the chain and am sick and tired of seeing associates be forced out so we can pay for the sins of a bunch of mental midgets at corporate.

The only reason that I can think of that would explain why Pruitt still has a job is because no one else wants it.

Anonymous said...

The Miami Herald’s ‘Naked Politics’ forum boasts
“The raw truth about power and ambition in Florida”
is at least as hilarious as “Truth to Power” by their Mommy Dearest.

Who is going to save this purveyor of pure bullshit? No one has answered how the Castro/Communist propaganda was printed as news. Now they print a feature on how a delegation of black members of Congress met with Raúl and Fidel Castro. Fidel is so ``very engaging, very energetic . . . very talkative.''

The article is a simple whitewash of what Communism has really done for Cuba. The whole flush article is a sham. There is only one small comment that should have been the headline:
' The lawmakers did not meet with any Cuban dissidents.’

MAS1916 said...

Obama may bail out the Bee as well. He cannot have too many of his allies go under or he will lose control of the propaganda stream.

Anonymous said...

8:07.... can you see a parallel between taking the profits from the hard working efficient papers and sharing those monies with the ones that are not making it and the tax the rich mantra of the leftists?

Let's take money from the more "fortunate" papers and share it with the less "fortunate" papers. Doesn't matter if the "fortunate" ones are making money because they work harder, have better management and more talent, what matters is they are more "fortunate". The less "fortunate" papers are victims.

Socialism 101.

Anonymous said...

Looks like the Modesto Bee will go online only

I see another round of layoffs for them.

They are having problems at the Modesto Bee. Management is not sure who will be sending the pages electronically to Sacramento.

Sounds like they should of thought this process out before they made the last cut.

This is what happens when you get management from other departments coming in to a area they know nothing about.

Like I said in past postings why do you think they gave Eric the new publishers job.
Look at the position he held prior to becoming publisher of the Modesto Bee.

" This is the first time in McClatchy's history that a publisher has come from the digital ranks of the company."

I can bet he will make the transition of the Modesto Bee to be online only. The writing is on the wall people.

Anonymous said...

8:54 ... Welcome to the U.S.S.A.

Anonymous said...

Yesterday I tried to call one of the larger newspapers in the chain. I could NOT get a HUMAN on the phone! How do they expect to sell ads or increase circulation if you only get re-routed through the recorded message again and again and again? What a way to run a business!

How about some of Mr. Pruitt's $2.7 million salary going to a minimum-wage worker to answer the phones????

Anonymous said...

Has anyone gone up to Pruitt and simply asked him, "Just what the hell are you doing?"

Anonymous said...

10:02 AM Negative, all communications are officially, "listen only." By order of Pru Master G.

Anonymous said...

Thanks for the reporting, McClatchy Watch. Lately, I've been out of the loop on this site. And this article pretty much sums up all anyone needs to know. My advice to all current employees: PREPARE NOW for when you get booted!

Anonymous said...

How ironic that journalists that decry MNI stealing money from the profitable successful papers, to give to the failing, poorly run papers, are the same people that swooned for a teleprompter speech promising to tax the rich, and hand the money to the poor. Anyone connecting the dots yet?

Anonymous said...

"March's 1,400 layoffs and other cost reductions were made to simply get the company through the end of the quarter (March 31) ..."

This doesn't make sense. Cuts in March won't yield many savings in Q1. Those savings would be aimed at Q2-Q3-Q4 when the employees and other operating expenses that were part of the reductions are off the books.

Anonymous said...

HELLO...and I will take a Gold Star for informing everyone about the additional layoffs destined for June. My comments back in Feb and March when all the crap was hitting the fan at all papers was right on target. I predict another 4-7% of personnel will be asked to find a new place to be a success. Watching this is terribly sad for those of us still making a profit or breaking even.........and busting rears with less people to do it. Is it any wonder attitudes and morale are in the crapper??????

Anonymous said...

The reduction targets kept getting upped in March (delaying announcements) because corporate wanted to base its projections on the rest of the year being as bad as February, the worst month in the history of living newspaper memory. The whole plan is to assure that all the papers eke out some level of profitability in '09. I don't think all the bean counters and CFOs lost sleep for a month or more in order to fuck up their reduction plans and under-deliver on their savings.

Anonymous said...

Much of the information in this article may be trying to hang fat on some spare ribs. Employees at the KC Star today were told that paper is positioned to need no further cuts in the coming year.

Anonymous said...

All of McClatchy's plans are based on the Miami land sale happening by June 30th. Ready the SEC filing. They need that land to sell and the $125 million to pay down their bank lines of credit.

So what happens if the buyer cannot raise the money or if the price gets lowered to make the deal happen?

Then McClatchy has to go back to the lenders to get permission. The lender will require other cuts in order to get debt down to managable levels.

From the last round of layoffs, we learned that McClatchy needs to layoff 1,400 to 1,500 people in order to achieve $110 million in annual savings.

So if the Miami land deal does not close by June 30th or if the price is lowered, then McClatchy is no longer on their plan.

Get ready for the next round of layoffs to makeup for the Miami land deal.

Anonymous said...

Well Anon 7:54 I hope you don't believe that crap. Let me tell you something. When Eric Johnston was named the new publisher of the Modesto Bee in front of many employees.

Frank Whitaker addressed us and told the employees that the Modesto Bee basically was doing okay and made it sound like we would be fine for awhile. HA HA

Yeah right a few weeks later we get told that there would be layoffs in March by Eric.

So you keep believing your management and publisher.

I will keep my eyes posted on McClatchy watch to read about layoffs at the KC Star.

Anonymous said...

I totally agree with 8:08 regarding 7:54's post - IF Star mgt. told that to employees - and I would be quite dubious that even happened, I sure wouldn't believe it. From people who I speak with in the know, projections, no matter how dire, keep falling apart. This is an accelerating disaster.

Anonymous said...

Employees at the KC Star today were told that paper is positioned to need no further cuts in the coming year.

You can fool some of the people all of the time. Now tell us informed KC Star faithful. Just how many times do you have to be told everything is peachy and we're set with no more layoffs before you start to suspect someone just might be pulling your leg? Hmmm?

Now, ask yourself this. How many home office shot callers in a position to determine actions taken over the next year are currently assigned to perform their magic at 18th & Grand?

Have you really not seen enough to know that Zieman et al, will smile in your face and do just the opposite then blame it on someone else? Do you not understand that it is imperative that they make you believe that you are secure in order to get the most out of you before cutting your lifeline?

I swear to god I'll never understand you people. You claim to be, "journalists" with a natural curiosity and healthy degree of critical thinking skills. But your willing to take the word of someone who's lied to you time after time.

Thank you God for not making me a liberal.

Anonymous said...

Re: 4/8 - 7:59
Right on the money.

Look at what happened when the land deal fell apart at the end of '08

Funny how the cuts basically equalled the dollars lost on the land deal

Anonymous said...

Sac Bee went to six-month budgeting awhile back, so the March cuts are prjected to last through Sept. Given the economic realities a June layoff wouldn't be surprising though. Sell off of property is coming too.

Sac's publisher sent out an email last week saying the Bee is making money and not going out of business. Goody goody for the bee but no word in the memo about McClatchy woes.

They watch what you do here and it gets under their skin.

Anonymous said...

It doesn't matter if an individual newspaper is making money. All of the newspapers are subsidiaries of McClatchy and McClatchy has $2 billion in debt.

McClatchy has pledged 100% of their assets, including all of the subsidiary newspapers and their assets, to secure their $2 billion in debt.

So your individual newspaper that is "profitable" on paper, actually has a share of the debt to service interest payments.

McClatchy needs to pay $150+ million per year in interest payments. So your individual newspaper needs to kick enough money up to McClatchy to make the monthly interest payments.

So it doesn't matter if you are "profitable". The issue is, are your profitable enough to pay down the debt on the schedule required?

If not, then it is time to cut some costs.

If the $2 billion in debt was assigned proportionally to each newspaper, it would be interesting to see how many make enough to pay their share of the debt.

Anonymous said...

Contending no more layoffs right now and hopefully for the next year is what was said. I was at the meeting. Does that mean everything is "peachy", well of course not.

But dire predictions in the midst of a dire situation requires no special talent. Simply an agenda that the sky has fallen and is about to fall again. Get a life.

Anonymous said...

But dire predictions in the midst of a dire situation requires no special talent. Simply an agenda that the sky has fallen and is about to fall again. Get a life.


Poor uninformed person. I've been telling you what was coming since the day that the KRI deal was finalized. The same day that I shorted MNI for the largest part of the next three years. This isn't predicting disaster in the midst of disaster.

It's all good though. Close your ears and believe whatever they tell you. You deserve what you are surely going to receive. I find it difficult to believe that there are fools who swallow what they are telling you, but, you are their fool. I am sure they had that in mind when they hired you.

Anonymous said...


and who are you? talking like your important and actualy know something. your nothing...and as long as you hide behind anonymous you will always be nothing. your just as much a fool as the guy your trying to belittle.

Check it out..

i new this was all going down when i was 5 years old but nobody listened to me. Just like the thing with the aliens

Anonymous said...

7:54 PM
“Employees at the KCStar today were told that paper is positioned to need no further cuts in the coming year.”

You remind me of the TV ad of the little boy that doesn’t want to listen to his parent, so he sticks his fingers in his ears, saying, “"LALALALALALA I CAN'T HEAR YOU.” Do you really think they are going to tell you are getting shitcanned in June? They need you to keep working until the end. Given the record of layoffs so far, I would take this statement with a few grains of salt, around a Margarita glass.

Anonymous said...

Note to my fellow jounros from a former and now recovered newspaper journo: JUMP SHIP ASAP. You are surfing on the Titanic.

Anonymous said...

Does anybody have a list of all the people (name names please) who got axed from the Charlotte Observer (I only care about the newsroom) last nonth?

Anonymous said...

If Tonya Jameson, the racist reporter of "WASS UP", is still at the Charlotte Observer, then they clearly did not cut enough.