As ads drop, McClatchy gets flexibility with banks

McClatchy said the amendment to a $1.175 billion debt agreement will change its terms to account for the company's reduced cash flow. In return, McClatchy agreed to put up more collateral and pay higher interest rates.

"It's important for the company to get additional flexibility," said Mike Simonton, media analyst at Fitch Ratings, which analyzes corporate debt. "The company had exhausted much of the room it had under its prior covenant package."

Simonton said McClatchy might have come close to hitting a technical default if it hadn't renegotiated the terms by Sept. 30. Such a default ultimately could have forced the company to sell assets or declare bankruptcy.

Other newspaper companies have been in similar situations this year.

"There are a number of newspaper companies negotiating with their bankers right now," said Ken Doctor, media analyst for the research firm Outsell Inc.

Simonton said McClatchy's efforts to renegotiate debt started long before the meltdown in the financial services industry over the past few weeks, but "certainly getting a deal done in this environment had to be a challenge."

Based in Sacramento, Calif., McClatchy is one of the nation's leading newspaper publishers. It has 30 daily papers, including The Sacramento Bee and The Miami Herald, and about 50 non-daily newspapers.

McClatchy has been working to reduce its total debt to about $2 billion, much of it coming from its 2006 purchase of the Knight Ridder newspaper chain.

But when its cash flow drops faster than its debt, the ratio of a company's debt to its cash--known as the leverage ratio--increases, even if the company doesn't borrow more money. Likewise, its interest coverage ratio--the ratio of cash to its interest payments--decreases if the cash flow drops relative to its interest payments.