Thursday, October 02, 2008

No stampede -- yet -- over S&P's credit warning

It's never a good sign when Standard & Poor's says it might downgrade a company's debt. But the ratings service's warning, disclosed yesterday, didn't seem to rattle Gannett investors too much. Nor did Gannett's announcement that it had tapped some of its $3.9 billion in revolving credit as other financing sources have dried up in recent weeks. Still, the developments opened a new front in the battle Gannett now faces in the mortgage-related meltdown of the credit markets.

The company said S&P's Ratings Services had placed its long and short term credit ratings on credit watch, with "negative implications." In other words, if GCI's financial situation worsens -- say, revenue falls even more -- S&P could judge Gannett a more risky investment. That would surely make it harder and more expensive to borrow money, because lenders would charge higher interest rates.

Gannett sought to reassure Wall Street. In a statement, GCI said it had partially drawn down on its "committed revolving credit facilities" enough money to cover all of its commercial paper obligations. "This action was taken prior to -- and was completely unrelated to -- Standard & Poor's actions today,'' the company said. “Our underlying fundamentals remain strong and we continue to be a solid investment grade company,” CEO Craig Dubow (left) said in the statement.

GCI's stock closed at $17.05, up 14 cents.

Gannett's announcement came against a scary backdrop: Wednesday, the Star Tribune said it skipped a debt payment as the Minneapolis newspaper tries to restructure $430 million in loans, The Wall Street Journal (paid subscription usually required) says. Publisher Chris Harte indicated the company is testing all options with its lender -- suggesting that a bankruptcy filing may not have been ruled out. Miami Herald publisher McClatchy agreed to pay higher interest rates last week in return for loosened debt restrictions, the WSJ says. Like Gannett, McClatchy has been hit hard by financial woes related to the housing bubble collapse, especially in Florida and California.

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  1. This post was delayed because I'm now staying at a hotel through next Tuesday that doesn't offer on-site Internet access. Sigh.

  2. Really people? No comments? Typical clueless journalists who all flunked math.

  3. People have a tendency to look at income statements first, and it's been well reported that Gannett suffered a 9.3 percent decline in revenue and a $2.1 million net loss in the first half of 2008. But the balance sheet gives you a deeper view of financial health. Although a glance at the company's mid-year 10-Q shows an increase in liquidity (current assets vs. current liabilities), you see a worrisome 5.5 percent increase in long-term debt since the end of 2007. Taking on more debt when the economy is slowing down is not a good move for a company in a dying industry and with a poor track record in innovation. The increase in borrowing raised Gannett's debt-to-equity ratio -- a key indicator of whether a company is overleveraged or not -- to 0.65 from 0.45 in just six months. A company with strong cash flow should be lowering its debt ratio, not raising it, in a slumping economy. Finally, notice that the value of Gannett's assets fell 16 percent in the past six months. That was caused by a $2.4 million writedown of assets in Gannett's publishing division. In other words, they're worth $2.4 million less than what Gannett said they were worth on Dec. 31. All of this has to make one wonder how Gannett can sustain a dividend payment that, as of Oct. 2, constitutes a 9.5 percent yield. And when that dividend is cut, watch out for more drops in the stock price.

  4. Dude, it's billion not million.


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