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Will Credit Default Swaps Do Gannett In?

A lengthy article in The Deal says it’s too late for Gannett (NYSE: GCI) to get itself out of the debt trap it now finds itself in. According to several unidentified “distressed debt experts,” the view is that Gannett could have saved capital by cutting its dividend much earlier than last February, when the newspaper publisher sliced payments to 4 cents from 40 cents for a $325 million savings. But more than that, Gannett should have staggered its debt obligations so that it would have had 10 years to pay off creditors, instead of the current three. The article concludes that by June 2011 Gannett will resemble a very different company.

Gannett, which is a poster child for all the challenges newspapers are facing, had a particularly dismal first quarter, with profits down 60 percent. While Gannett has been aggressive on the web, its debt problems may quickly negate any progress on that front. Here’s how Gannett wound up in such financial straits.

Painted into a corner: Gannett is boxed in by the lingering credit crisis, which gives it little room to change the terms of its debt covenants. And aside from being affected by the newspaper industry’s downward spiral, Gannett is also the victim of so-called “negative-basis trades featuring credit-default swaps.” That means that many of Gannett’s bondholders have bet that the company will default on its debts, by buying securities that gain in value if that happens. One analyst tells The Deal that Gannett will have to raise more than $400 million between now and the first half of 2011. Considering the bond market’s bet that Gannett will falter, there’s little incentive, it seems, to give the company more breathing room.

A credit default swaps magnet: Other companies, like the Walt Disney Company, for example, have more debt than Gannett. But because of the difficult position of newspapers, bondholders have sought more debt protection against Gannett. The amount of CDS protection taken out on Gannett is $2.3 billion versus $1.8 billion for Disney (NYSE: DIS). This situation occurred fairly quickly. In the spring of 2008, Gannett’s debt ratio was roughly 2.1 times EBITDA, while the publisher’s publicly traded peers averaged 4.4 times EBITDA, according to The Deal. But by the end of the year, Gannett’s EBITDA fell 26 percent, to $1.5 billion. Gannett’s 2009 EBITDA is forecast to drop another 38 percent to $922 million. All of which conspires to further limit Gannett’s options and only propels bondholders to continue to bet against it.

Too late: Gannett tried to extend maturities on some of its debt two months ago, with some notes now coming due between 2012 and 2016. But there’s still a lot of debt coming due in the next two years: $712 million by June 2011, followed by $2.8 billion that matures within the year after that. Gannett reps told The Deal that the exchange has given the company the wherewithal to manage its payments. But since few buyers bit at the debt offering, The Deal quotes one observer as saying, “Bondholders are saying that they’re hedged and that they basically want the company to die.” Meanwhile, Gannett is also dealing with the absence of CEO Craig Dubow on medical leave, all of which continues to shake confidence in the company.