Moody's says GateHouse in danger of defaulting

GateHouse Media, the New York-based newspaper chain that owns the once "local" newspapers in Rolla, St. James, St. Robert, Camdenton and other Missouri towns, been downgraded by Moody's Investor Service.


Editor & Publisher reports:

GateHouse Media is likely to default under its credit agreement unless it can negotiate an amendment to its covenants or get a cash injection from its largest stakeholder, Fortress Investment Group, says Moody's Investor Service in a report downgrading the community newspaper publisher's credit and probability of default ratings.

Moody's downgraded GateHouse's Corporate Family rating to Caa1 from B2. Under Moody's definition, the new rating signifies a "substantial risk" of default.

Moody's also downgraded its Probability of Default rating to Caa2 from B3.

"The downgrade reflects Moody's heightened concern that GateHouse could face a near-term default under the financial covenants of its loan agreement, absent an amendment or another equity cure from its largest owner, Fortress Investment Group LLC," Moody's Senior Analyst John Page wrote.

Moody's also kept GateHouse on a negative outlook, suggesting another downgrade is likely.

Forbes reports:

The negative outlook reflects GateHouse's tight liquidity profile, reliance on proposed asset sales, probability of softening of sales further and that current market valuations may prove insufficient to provide full recovery to lenders in a distress scenario.

The negative outlook also incorporates concern that GateHouse's management will continue its pace of acquisition activity in the face of recessionary-like market conditions, Moody's added.

AXcess News reports:

The dismal news coming out of Moody's Investor Service really came as no surprise, but in reading into the rating agency's comments on Gatehouse Media's debt, the analyst covering the Company had to bite his lip to keep him from commenting about the dividend Gatehouse paid out in the last quarter.

Moody's questioned management's thinking in noting that Gatehouse Media was relying "upon proposed asset sales to provide financial flexibility." The rating agency pointed out that the newspaper publisher had but $25 million in its pocket and all but $11 million of that was the remaining balance on a revolver line of credit that Moody's says is doubtful its lender would permit Gatehouse to use.

"At the end of March 2008, GateHouse's credit agreement-defined results provided the company with a modest 3% cushion within its total leverage financial ratio tests," the Rating agency noted. "Moody's considers it highly questionable whether GateHouse will be able to comply with this covenant test over the near term without the benefit of proceeds from asset sales or another equity cure from its largest shareholder."

While Gatehouse had gone on an acquisition binge when it bought nine newspapers in Ohio and Illinois from Copley Press, Inc., what it didn't buy was the Copley News Service, a 53-year-old wire service that distributes news, political cartoons and opinion columns. Instead, Gatehouse looked to set up its own newswire in Illinois, whose focus over the last year has been Gatehouse's community websites. That division, headed in New York by a newspaper photographer with some experience in managing websites (aka 'Sailor' Bill), has done little to develop news syndication clients - both online and in print. Why Gatehouse didn't buy an already established newswire for that purpose raises questions over management's capabilities that Moody's was more than polite in citing. It ranks in testimony of Gatehouse Media's inability to compete - both online and in print.

Perhaps Motely Fool put it best in late May when it listed Gatehouse Media as a "Deathbed Stock".

Monday's rating cut could be Gatehouse Media's funeral march.

GateHouse closed at 72 cents per share today, up six cents from yesterday's 66-cent closing price.