McGuire on Media

McClatchy bond sale forces some hard realizations about newspaper corporations

When I opened my email one day last week this subject line greeted me: “Would you lend money to McClatchy?”

It was a note from my financial adviser, Morgan Stanley Smith Barney’s  Chuck Kerl. It read: “Tim, I thought you’d find this curious. Someone has a half million of McClatchy bonds for sale that mature in 5 years. If they pay off, it’s a 4.5% yield to call. They are seriously low rated – a single B rating.” The formal translation of a B rating is this: ““More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.”

However Chucks’ informal and skeptical definition for his clients is “There is a high degree of uncertainty regarding the company’s ability to repay principal or make timely interest payments.”  Chuck told me that with the observation, “How the mighty have fallen!”

Chuck knows exactly how far McClatchy has fallen because he “urged” me to sell all my McClatchy stock between $64 and $74. Today, McClatchy stock is trading at $2.39.

I immediately called Chuck with some questions and a  comment. My first question was who is “someone.” He explained that  Morgan Stanley is selling the bonds and he assumes they bought them from a big investor who wanted to shed them.

My second question was why is the yield only 4.57% if the bonds are that low-rated.  His answer frightened me a bit. He said there is such a high demand for bonds of this low rated character that the market settles for a relatively low yield. cIf the bonds are held to the maturity date if 2017 the yield would be 8.4%. Chuck said ‘if the yield was 12 per cent this would be a different proposition!”

My final question was how can I link to this information for my readers. Apparently I can’t. Chuck said you’d need a Bloomberg terminal to get at this offering. He later explained the McClatchy bond was in Morgan Stanley’s bond inventory offered for retail sale. For those who understand this stuff, it’s CUSIP is 579489AE5. It is a 11.5 per cent coupon bond, maturing on 2-15-2017, callable on 2-15-2013. The offer price is 110.847.

My comment to my financial adviser was crisp, clear and final:”Hell no, I don’t want to invest in McClatchy!”

There was absolutely no humor intended in my response.  In fact, my quickly formulated answer gave me great pause and forced me to to carefully contemplate what I am feeling about newspapers and newspaper investments these days.

I admit that I have completely lost confidence in the corporate newspaper model.

That’s no small admission for a man who, at 17, stopped delivering papers on a Saturday and started writing sports for the local newspaper on Monday. The newspaper business of the 70’s, 80’s and 90’s made for one of the richest working experiences possible and for a comfortable retirement.

It prepared me to spend several years teaching bright students at Arizona State University’s Walter Cronkite School. And therein lies an irony. I am incredibly bullish about the prospects for journalism, my journalism students and even local news gathering organizations. I am bearish on newspaper corporations.

Wednesday afternoon, a good friend pressed me on why I say that.

It’s not as if I hate newspaper corporations. I believe they have done more for newspapers than independent ownership could have ever done. Yet the digital age demands more flexibility, more attention to local needs and less attention to national efficiencies offered by corporations. 

I have become convinced by the drumbeat of bad news about newspapers that corporate ownership simply cannot beat the legacy costs hanging over them. Ill-advised debt, underfunded pension obligations and other “legacy costs” are dragging down companies whose only strength is strong local brands.

That’s exactly what Journal Register CEO, John Paton,  argued when he announced that company’s second bankruptcy in three years. “While the Journal Register Company cannot afford to halt its investments in its digital future it can now no longer afford the legacy obligations incurred in the past.” Paton said. He added, “Many of those obligations, such as leases, were entered into in the past when revenues, at their peak, were nearly twice as big as they are today and are no longer sustainable. Revenues in 2005 were about two times bigger than projected 2012 revenues. Defined Benefit Pension underfunding liabilities have grown 52% since 2009.”

I hate the thought that thousand of fellow journalists who worked in good faith for years, face a tumultuous pension future.  I hate the injustice of it and I pray more newspaper companies will follow the New York Times example of reducing obligations by offering lump-sum buyouts.

That seems like a solution that carries compassion with pragmatism even though it’s still an uncomfortable option.

But pension costs are an easy target for corporations when the ill-advised decisions  by corporate leaders to deeply leverage their companies with huge debt are probably the bigger culprit. In hindsight that debt was a bad idea but  the real question is what does it mean for the future? Those local brands have a fighting chance based on current operations but legacy costs are killing them.

One of the most important things on Twitter and the blogs last week was my friend Steve Buttry’s speech to the Arizona Newspaper Association. Steve boldly declared newspapers and journalists need to embrace discomfort. It is amazing to me and should be embarrassing to the news industry that this message is still bold and mandatory.

A lot of creativity gurus like this one, and this one, and this one demand we escape our comfort zone to show real creativity.

Getting out of the comfort zone should be a manifesto for newspaper companies.

One of those uncomfortable issues that needs to be discussed is what kind of ownership structure is going to best facilitate protecting journalism, journalists and strong local news brands? 

Certainly a lot of small, local publishers are running scared too and some local owners are making newspapers their personal playthings.

I believe operating independently with corporate steerage would allow newspaper operations to: 1) Understand local needs 2) to adjust fast to specific local realities and 3) they would not be tied to a one-size-fits-all set of solutions dictated from afar. 

There is not a simple answer but my skepticism about buying into a McClatchy newspaper bond made it clear to me that accepting corporate ownership as the only solution going forward is naïve and dangerous.

Embracing discomfort by debating whether ownership groups or local ownership provides the best way to serve the journalistic needs of our communities, strikes me as a essential.