The Fed Opens The Banking Window A Tad For Companies, Loosening The Newspaper Noose Just A Little

Philip M. Stone October 8, 2008

For the past couple of weeks ftm has urged US government financial help for newspapers that can’t get working capital loans because of the credit crunch, so it’s good news that the Fed decided Tuesday that it was opening up its bank window to companies that can’t get their normal credit lines through normal banking sources, primarily because nothing is normal any more right now in the banking world.

Just Monday we wrote how Gannett had to borrow $2.1 billion from its $3.9 billion line of credit in order to honor its commercial paper. Gannett either could not sell more commercial paper because the market had dried up, or the cost was prohibitive, so it took from its line of credit which in turn prompted Standard & Poors to put the company on credit watch with a view to downgrade.

But the Fed has now come to the rescue of companies like Gannett that have found their normal way of getting short term loans to carry on normal business practices have practically been frozen. Apparently the short-term commercial paper market totals around $100 billion daily, used by companies to meet payrolls and the like. But since that market has basically dried up the Fed announced it was creating a new entity that would buy three-month unsecured and asset-backed commercial paper directly from eligible companies. Those companies whose commercial paper don’t meet the asset-backed test, or cannot provide other forms of security that the Fed would accept can pay an up-front fee to get the credit.

If the Fed had done this before Gannett resorted to accessing its line of credit then it probably would have escaped S&P’s downgrade notice.

With so many newspaper companies in debt crisis, with debt payments being missed by the likes of the Minneapolis Star Tribune and the Philadelphia newspapers, with private newspaper groups like Freedom Communications that publishes the Orange County Register (California) announcing it “may not be in compliance with formula  based financial covenants” of its debt – translation: It drew down far more from it banking line of credit than allowed by its debt agreements – it is getting progressively difficult  just to have the day-to-day funds needed for running a business.

The Fed’s action at least should loosen up the availability of getting normal commercial paper credit lines. The action does not, however, solve the underlying problems of the newspaper business – that business is real tough these days, and is forecast to get even tougher.

Advertising predictions are being lowered almost daily, financial analysts are telling their customers they expect steep newspaper revenue declines through 2009 and that cost cuts aren’t equaling revenue declines, newspaper companies are cutting shareholder dividends and have suspended share buybacks (was it that long ago that Wall Street was urging increased dividends and share buybacks to increase shareholder value?)

Everyone is keeping a close eye on Gannett (down 3.2% Tuesday). John Janedis, media analyst for Wachovia Capital Markets (will he survive the Citi-Wells Fargo tussle?)  says he thinks the largest US newspaper publisher may see its Q4 revenues drop by 9% from a year ago and that’s with this year’s figure having been helped considerably by the TV election advertising.

Gannett has been firing people right and left, changing its pension plan funding, reorganizing, etc.  so what more can it do to better its bottom line? Roy Greenslade, the premier UK newspaper analyst, has written he believes Gannett could well think about putting its UK Newsquest regional newspaper group on the block. Gannett has already said this year that Newsquest weighs heavily on its bottom line so it would be a natural to dump.

One problem, however, is the market for UK regional newspapers these days is awful. Northcliffe tried to sell its group a couple of years back but the best offer was around £1.3 billion (supposedly from no less than Gannett) when Northcliffe was looking for £1.5 billion and the newspapers were taken off the market (one wonders now with the benefit of hindsight whether Lord Rothermere should have taken the money and run?) Trinity Mirror recently sold a few regionals at fire sale prices, but the rest it took off the market because the offers were so low, so if Gannett was to put its 210-paper chain (including 18 dailies) up for sale it would do so knowing that current valuations are rock bottom.

And further more British banks seems to be in as much trouble as American, if not more, so credit lines to do such deals are few and far between unless very rich Middle East or Asian entrepreneurs can be persuaded this is a great time to enter the UK media market.

The Fed’s action to buy in commercial paper at least takes the pressure off newspaper companies like Gannett that rely on such short-term borrowings to run their daily business.  But the truth is that newspapers struggling under debt loads and close to or exceding loan agreements limits for cash flow ratio to repayments, are not going to see any improvement in their business through at least the end of next year, if the forecasters and analysts are right.

Newspapers that do better than a 14-16% drop in revenues this year should consider they have done well, but they should expect another 10-12% decline again next year. And since there are few cost-cutting options that newspapers haven’t already tried just what more can they do to ensure cash flow to run their business, let alone have a decent margin?

Maybe Yahoo’s newspaper consortium might come up with important Internet dollars; maybe doing deals with competitors to share costs might help; maybe cutting out 40 pages a week, printing less times a week, and reducing sections is the way forward; maybe taking a fresh look at how local advertising is sold on all platforms and how local content is created is a key; maybe out-sourcing non-core functions  can reduce costs; but don’t forget that without investing in the future the present will die.