The McClatchy Co., facing falling revenue and profit, renegotiated its bank loans Friday to win greater financial flexibility.
While the company says it's in no danger of defaulting or missing a debt payment, it was seeking greater latitude from its lenders.
"The impact of the current environment on our cash flows necessitated taking the initiative," Chief Financial Officer Pat Talamantes said in a news release.
But the agreement comes at a price. The Bee's owner will have to pay a higher interest rate. Its line of credit has been scaled back. And it could be prohibited from paying any shareholder dividends under certain circumstances, although that ban wouldn't take effect until next spring.
The deal is in response to a significant slide in revenue and profit, a trend that's humbling newspaper publishers everywhere. Sacramento-based McClatchy carries the added burden of about $2 billion in debt remaining from its 2006 takeover of Knight Ridder Inc. The debt includes $1.175 billion in bank loans and available lines of credit.
Tom Corbett, an analyst at Chicago investment research firm Morningstar Inc., called the agreement a positive step.
"A company that's as highly leveraged as McClatchy can use all the financial flexibility they can get," he said. "The tourniquet is not quite as tight."
McClatchy stock jumped 50 cents a share in after-hours trading, to $5, after the bank deal was announced. In regular New York Stock Exchange trading, it closed at $4.50, up 25 cents.
Corbett said the banks were likely impressed by McClatchy's decision last week to cut its dividend in half, freeing up cash for debt payment. McClatchy also trimmed its work force by 10 percent, the second such reduction in three months.
The new bank deal raises the ceiling on McClatchy's allowable "leverage ratio," a figure that compares its profitability with its debt burden. The ratio fluctuates with profitability, and as profits fall, the ratio goes up. If a borrower exceeds the ceiling, that could trigger a default and a lender could take legal action.
McClatchy was below the ceiling, but the new deal gives it more headroom, said Treasurer Elaine Lintecum.
In return, McClatchy will immediately pay an extra 0.25 percent interest on its bank debt. That will cost up to $2.8 million a year in additional expense, Lintecum said. If the leverage ratio climbs above a certain point – even if it doesn't bump up against the new ceiling – the borrowing costs could increase by $11 million a year, she said.
McClatchy paid $150 million in interest last year on its bank and bond debt, she said.
Under the new agreement, McClatchy can't borrow as much money. Its line of credit has been cut by $25 million, to $600 million. Lintecum said the company can operate comfortably with that.
In addition, the deal limits McClatchy's ability to pay dividends.
For the next six months, dividend payments can't exceed $16 million, Lintecum said. That isn't a problem for now; with its recent dividend cut, McClatchy now pays about $15 million to shareholders every six months.
But if the leverage ratio shoots up beyond a certain point, the company would be prohibited from paying dividends altogether beginning next spring, she said.
Call The Bee's Dale Kasler, (916) 321-1066.
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