Tribune's risk of default

It could happen to the owner of the LAT in as little as 18 months - and it wouldn't take that much. Analyst Dave Novosel figures that the company has nearly $4 billion in debt and interest payments coming due by the end of 2009. That's quite a bit more than other estimates - Reuters Loan Pricing has Tribune needing to repay at least $1.6 billion in 2008 and 2009 - but Novosel says he's factoring in not only interest but debt and amortization payments. Whatever the number, let's agree that it's huge - and Tribune's ability to pay it off depends largely on the amount of cash coming in. As we noted the other day, nearly all of the company's operating cash flow went to pay interest in the fourth quarter. Reuters quotes a source as saying that Tribune's previous management overestimated 2007's anticipated cash flow by about 20 percent.

With all the bloodletting that newspapers have seen in the past few weeks, it’s a good guess that the situation has not exactly turned around. Goldman Sachs analyst Peter Appert expects first-quarter newspaper ad revenue to fall by 10 percent. "Managements will find it nearly impossible to fully offset this level of revenue decline with cost cutting," he said. If Tribune can't pay off its debt obligations by using cash flow or slashing budgets, the likely alternative would be selling assets. "Tribune is a big microcosm of issues across the industry, and Sam Zell made an unfortunate bet, if you will, jumping into a business he knew nothing about," said newspaper analyst Miles Groves. From Reuters:

Tribune has an existing bank facility that could cover $260 million of $1 billion debt obligations this year, said Fitch analyst Mike Simonton. But Novosel said that was a stop-gap measure. "Tribune could tap credit lines, but this could impair cash needed for operations, so it is only a temporary solution," he said. Tribune's lackluster results at the beginning of the year prompted Standard & Poor's to lower its corporate credit rating on March 17 to "B-" from "B" with a negative outlook.

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If ad revenues keep falling, Tribune could drift perilously close to violating covenants on its senior secured debt. These require the ratio of the company's debt to the trailing four quarters of EBITDA (earnings before interest, tax, depreciation and amortization) to not exceed 9 to 1. Fitch estimated the company was at 8 to 1 at the end of 2007. By the first quarter of 2009, that covenant tightens to 8.75 to 1, "further pressuring flexibility around the covenants," Fitch said of Tribune on March 24.