Banks try to save the newspaper business

Filed under: Forecasts, Deals, Industry, Newspapers

Within the past years, several public newspaper companies have been pushed to the cliff of insolvency. They have taken on too much debt and the downturn in advertising has put them in a position where they cannot cover interest payments.

Journal Register was knocked off The New York Stock Exchange and is in the process of liquidation. The value of its properties has dropped so low that its common shareholders will get nothing and creditors will not recover the amount of their loans. Gatehouse Media (NYSE: GHS) has traded under $1 for weeks and also face delisting. Odds are that its properties will have to be auctioned off.

Banks may be employing a new tactic in the hope of getting their money out of the newspaper industry. Extend loans, let the companies cut expenses to the bone, and pray that advertising will get better. If it does, they might get their money back. McClatchy (NYSE: MNI), the nation's third largest chain, was the next company in the industry to head toward liquidation. Based on a new lifeline from its creditors, it may dodge that for awhile. According to The Wall Street Journal (subscription required), "The publisher of the Sacramento Bee and Miami Herald said Friday its banks agreed to loosen restrictions on the company's level of debt compared to cash flow, and its ratio of interest payments to cash flow."

The banks are making a big mistake. McClatchy's has many of its properties in California and Florida were the economies could be troubled for years. By letting McClatchy stay in business, the banks are risking that the value of the company's papers will drop even more. If McClatchy is sold off in pieces now, creditors might get most of their money back.

The holders of McClatchy's debt may have saved the company, for a few months at least. They have also put themselves in a position to lose most of their money.

Douglas A. McIntyre is an editor at 247wallst.com.

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