Moody’s Joins S&P In Downgrading Black Credit

Black Press Ltd., the Canadian parent of the Akron Beacon Journal and new minority owner of the San Diego Union-Tribune is likely to bump against it loan covenants within the next year as it’s squeezed by declining revenue from its U.S. newspapers and a weakened Canadian dollar, Moody’s Investors Service said Wednesday.

Moody’s downgraded Black’s corporate family rating (CFR) and senior secured credit facility rating to B1 from Ba3. The new rating is deeper into junk territory and defined by Moody’s as “very speculative.” The ratings firm also lowered its “probability of default rating (PDR) to B2 from B1, suggesting a 32% probability of a default even within a year.

About C$410 million (US$359.2 million) of debt was rated by Moody’s, which noted it was not including Black’s Honolulu Star-Bulletin in its ratings. Moody’s also downgraded the outlook on Black Press to negative from stable, suggesting further downgrades are possible.

“The CFR downgrade to B1 reflects recent deterioration in Black Press revenue, earnings and liquidity profile and Moody's expectation that operating results and key credit measures will not improve materiallyover the medium term,” wrote analyst Suzanne Wingo.

Moody’s says that Vancouver, B.C.-based Black’s nearly 170 papers in Western Canada have been “resilient” through the newspaper recession, although weakening in the last quarter. The problem is its U.S. papers are significantly dragging down revenue and EBITDA, Moody’s says.

Earlier this month, Standard & Poor's Ratings Services similarly downgraded Black Press farther into junk on concerns of weakening liquidity and a growing debt burden.

Moody’s analysis of possible covenant defaults is below the fold:
In analyst Wingo's words:

The downgrade and negative outlook further reflect Black Press' weak
liquidity profile, in which a leverage covenant default over the next
four quarters is considered highly likely by Moody's. At February 28,
2009, the company's leverage covenant calculation was approximately 5.3
times versus a current requirement of 5.5 times that steps down to 5.25
times at August 31, 2009. Reported debt, denominated mostly in US
dollars, has increased materially over the last several quarters due
predominantly to the conversion impact of the stronger US dollar.
Deterioration in EBITDA has further exacerbated covenant tightness,
leaving little margin for an unexpected shortfall in results. A covenant
violation could limit access to the company's revolver and accelerate
repayment of the credit facility, absent an amendment or waiver.
Nevertheless, free cash flow is expected to remain modestly positive
over the next year, despite difficult market conditions.

[S0ource: Titz and Jen, Editor & Publisher blog]