TEXT-S&P cuts Black Press corporate credit rating to 'B-'

Tue Nov 6, 2012 3:25pm EST
 
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article
[-] Text [+]

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. Use the Ratings search box located in the left 
column.