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Newspaper publishers face elevated default risk in pandemic's wake

As Wall Street waits to see whether the advertising market will have a slow or speedy recovery from the coronavirus pandemic, newspaper publishers continue to face elevated levels of risk.

The one-year market signal probability of default scores for several major publicly traded newspaper publishers remain up as compared to pre-pandemic levels, according to an analysis by S&P Global Market Intelligence using its newly launched Marketplace database. The scores take into consideration share price volatility, geography and industry-related risks.

Among public U.S. newspaper publishing companies trading on NYSE or Nasdaq, Gannett Co. Inc., the largest U.S. newspaper chain with 261 newspapers in 46 states, had the highest one-year market signal probability of default at 38.2% as of market close May 26. Notably absent from the list of analyzed publishers is McClatchy Co., which filed for bankruptcy reorganization in February and which currently trades on the OTC Pink marketplace.

While Gannett's one-year market signal probability of default score is down from an April 7 high of 59.9%, it is up significantly from early March, when the score was in the low-to-mid 20% range.

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On March 11, when the World Health Organization declared COVID-19 a global pandemic, Gannett's one-year market signal probability of default score jumped to 34.6%, up from 23.1% a day earlier. The score then spiked again in early April after the company warned April 1 that it expected its revenues to be "significantly impacted by the COVID-19 pandemic" due to declines in advertising and events.

In May, Gannett CEO and Chairman Michael Reed quantified the impact, saying that lost revenues in the last two weeks of March totaled roughly $17 million.

In an effort to preserve liquidity, the company enacted cost-saving measures totaling $100 million to $125 million, including layoffs and furloughs; significant pay reductions for senior management; as well as the cancellation of nonessential travel and spending.

The company also reduced capital expenditures by 20% for the remainder of the year, equating to about $10 million in cash savings, and suspended its quarterly dividend. Additionally, Gannett is leveraging the Coronavirus Aid, Relief, and Economic Security Act to defer various payments until 2021 and 2022 interest-free.

"This improves our 2020 liquidity by a little more than $50 million over the remainder of this year," Reed said.

Liquidity is paramount for Gannett, which is still paying down debt from its combination with GateHouse Media LLC parent New Media Investment Group Inc. In November 2019, in connection with the deal, Gannett entered into a five-year, senior secured term loan facility with Apollo Capital Management LP in an aggregate principal amount of approximately $1.79 billion.

Since entering into that loan, Reed said in May the company had paid down $50 million in debt. But the company faces a roughly $125 million interest payment on its term loan due in June, followed by third- and fourth-quarter payments of approximately $50 million each.

Between the $200 million of cash on hand and an expected $50 million in real estate sales expected in the second quarter, Reed said the company is "highly confident" that it can make its required interest payments.

"It's so very hard today to know what next year will look like," Reed said. "However, we have a great relationship and a very open dialogue with our lenders, which gives us comfort that we can deal with the unknown, the uncertainty and the unforeseen, should the need arise."

Other newspaper companies have also taken steps to preserve liquidity. A. H. Belo Corp., for instance, reduced salaries, cut back on capex and lowered its dividend.

"The responsible stewardship of the company's balance sheet will allow us to come out of the downturn in a position of comparative strength," Grant Moise, president and publisher of The Dallas Morning News, the company's flagship paper, said in a statement. The company's one-year market signal probability of default score was 18.9% as of market close May 26, up slightly from pre-pandemic levels.

News Corp., publisher of The Wall Street Journal, said May 27 that its Australian subsidiary would stop print editions on more than 100 papers and cut select jobs in a measure aimed at reducing costs. News Corp. Australasia's Executive Chairman Michael Miller said the ongoing consumer shift to reading and subscribing to news online; the acceleration of businesses using digital advertising; and the impact of COVID-19 on community and regional publishing have prompted the company to reshape its strategy.

News Corp.'s one-year market signal probability of default score was 9.3% as of market close May 26, up from a range of 2% to 3% before the pandemic.