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Overview -- We are lowering our long-term corporate credit rating on Victoria, B.C.-based Black Press Ltd. to 'B-' from 'B' based on our view of the company's ongoing organic revenue and profit declines, as well as refinancing risk. -- At the same time, we are revising our recovery rating on the company's senior secured bank debt to '1' from '2', while affirming our 'B+' issue-level rating on the debt, reflecting our view of improved recovery prospects given Black Press' continued repayment of the debt. -- The negative outlook reflects our expectation that we could lower the ratings in the near term if the company fails to address its refinancing risk. Rating Action As Standard & Poor's Ratings Services previously announced, on Nov. 1, 2012, we lowered our long-term corporate credit rating on Victoria, B.C.-based Black Press Ltd. to 'B-' from 'B'. The outlook is negative. We base the downgrade on our view that Black Press' operating performance will remain weak in the medium term due to difficult industry fundamentals. While revenue remained largely flat for the six months ended Aug. 31, 2012, compared with the same period last year, reported EBITDA was down 6.3% during this period. Given the lackluster economy and declining newspaper print advertising sales, we expect the company's performance to remain sluggish for the remainder of fiscal 2013 (ending Feb. 28, 2013). Furthermore, Black Press faces refinancing risk with its senior secured bank facilities maturing in August 2013 and senior subordinated notes maturing in February 2014. At the same time, we revised our recovery rating on the company's senior secured bank debt to '1' from '2', and affirmed our 'B+' issue-level rating (two notches above the corporate credit rating) on the debt. A '1' recovery rating indicates our expectation of very high (90%-100%) recovery in the event of default, in contrast to a '2' recovery rating, which indicates our expectation of substantial (70%-90%) recovery. We revised the revised recovery rating based on our view of improved recovery prospects for the senior secured debt given Black Press' continued repayment of the debt. Rationale The ratings on Black Press reflect Standard & Poor's assessment of the company's vulnerable business risk profile and highly leveraged financial risk profile (as our criteria define the terms). We base our business risk assessment on the company's weak operating performance, declining organic revenue base, and lack of revenue diversification outside of the newspaper publishing industry. We believe the industry faces long-term secular pressures related to market share erosion toward online and other forms of advertising. Partially offsetting these business risk factors, we believe, is the company's solid market position within several of its regions. Our financial risk assessment is based on Black Press' aggressive financial policy, weak credit protection measures, high debt burden, and tight leverage covenant cushion. Black Press has followed a clustering strategy with its portfolio of newspapers. Western Canada is the company's core geographic market, generating 71% of revenue in the six months ended Aug. 31, 2012, with Ohio and Washington State making up the balance. Black Press' revenue declined 0.9% in the six months ended Aug. 31, 2012, compared with the same period in fiscal 2012, largely because of lower advertising sales and reduced printing revenue, partially offset by the contribution from U.S. acquisitions and favorable foreign exchange. We believe the company's key source of revenue, newspaper print advertising sales, will remain soft compared with historical performance. The reported EBITDA margin declined to 19.6% in the first-half fiscal 2013 compared with 20.7% for the same period the year before. Our base case scenario for Black Press in fiscal 2013 expects: -- Revenue to decline on an organic basis in the low-single-digit percent area due largely to lower advertising sales; -- Margins to be pressured from the expected decline in revenue combined with the company's relatively high fixed-cost base; -- Newsprint costs to have no significant impact on margins this year; and -- Free cash flow to remain sufficient to support term loan amortization. While Black Press' debt balance has declined this year from scheduled amortization payments and the cash flow sweep, EBITDA also declined resulting in flat-to-weaker credit protection measures year-over-year. Adjusted debt to EBITDA of 5.0x in the 12 months ended Aug. 31, 2012, is unchanged year-over-year; while EBITDA interest coverage weakened to about 2.2x during this period from 2.9x for the 12 months ended Aug. 31, 2011, due to lower EBITDA and higher interest costs. We expect credit measures to remain in line with the ratings category in the next year. Liquidity We believe Black Press has less-than-adequate liquidity based on refinancing risk and the company's tight leverage covenant cushion. Relevant expectations and assumptions in our assessment of Black Press' liquidity profile are as follows: -- Its sources of liquidity are free cash flow and cash. -- The company was compliant with its financial covenants at Aug. 31, 2012, including a maximum 4.75x debt-to-EBITDA ratio and a minimum 2.00x EBITDA interest coverage ratio. However, compliance with the leverage covenant would not have survived a 15% drop in EBITDA at Aug. 31, which is the minimum required for our definition of adequate liquidity. -- We believe Black Press will generate sufficient cash flow in fiscal 2013 to support term loan amortization and capital expenditures. -- Black Press is subject to a cash flow sweep (as defined in the credit agreement) as long as debt to EBITDA exceeds 3.75x, which has resulted in debt repayment above the scheduled amortization. -- The company faces refinancing risk as its senior secured bank facilities mature in August 2013 and senior subordinated notes mature in February 2014. Recovery analysis We rate Black Press' senior secured bank debt 'B+' (two notches above the corporate credit rating on the company), with a '1' recovery rating indicating our expectation of very high (90%-100%) recovery in the event of default. Outlook The negative outlook reflects our expectation that we could lower the ratings on Black Press in the near term if the company fails to address its refinancing risk. In addition, we could consider lowering our ratings on Black Press if operating performance weakens more than we expect, if adjusted debt to EBITDA is above 6x, or if there is less than a 10% EBITDA cushion within the financial covenants. We could revise the outlook to stable after completion of the refinancing for the company's debt coming due in the next 18 months, as well as if the company demonstrates sustainable improvement in its operating performance, including revenue and margin stability, which we expect would result in adequate covenant cushion with continued debt repayment. Black Press is a private company and does not release financial information publicly. Related Criteria And Research -- Methodology and Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Rating Lowered To From Black Press Ltd. Corporate credit rating B-/Negative/-- B/Negative/-- Ratings Affirmed/Recovery Rating Revised To From Black Press Group Ltd. Senior secured debt B+ B+ Recovery rating 1 2 Black Press U.S. Partnership Senior secured debt B+ B+ Recovery rating 1 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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