June 8, 2012 / 7:58 PM / 8 years ago

TEXT-S&P revises Black Press outlook to negative

Overview	
     -- We are revising our outlook on Victoria, B.C.-based Black Press Ltd. 	
to negative from stable based on our view of the ongoing headwinds the company 	
faces with revenue and profitability declines given difficult industry 	
fundamentals, as well as refinancing risk. 	
     -- We are affirming all our ratings on the company, including our 'B' 	
long-term corporate credit rating. 	
     -- The negative outlook reflects Standard & Poor's view of Black Press' 	
challenges, including our expectation of weak operating performance and 	
refinancing risk.	
	
Rating Action	
On June 8, 2012, Standard & Poor's Ratings Services revised its outlook on 	
Victoria, B.C.-based Black Press Ltd. to negative from stable. At the same 	
time, Standard & Poor's affirmed its ratings on the company, including its 'B' 	
long-term corporate credit rating. 	
	
The outlook revision reflects our view of the ongoing headwinds the company 	
faces with revenue and profitability declines given difficult industry 	
fundamentals, as well as refinancing risk. Black Press experienced soft 	
operating performance in the fiscal year ended Feb. 29, 2012, compared with 	
fiscal 2011, which was in contrast to the improvement we were expecting 	
year-over-year. While revenue declined 3.5% in fiscal 2012, reported EBITDA 	
was down 6.3% during the year. Given the slow economic recovery and declining 	
industry advertising sales, we expect the company's performance to remain 	
sluggish this year. Furthermore, Black Press faces refinancing risk with its 	
senior secured bank facilities maturing in August 2013. 	
	
Rationale	
The ratings on Black Press reflect Standard & Poor's assessment of the 	
company's vulnerable business risk profile and aggressive financial risk 	
profile (as our criteria define the terms). Our business risk assessment is 	
based on the company's weak operating performance, declining 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, in our opinion, is the company's solid 	
market position within several of its regions. Our financial risk assessment 	
is based on Black Press' weak credit protection measures, high debt leverage, 	
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 	
72% of revenue in fiscal 2012, with Ohio and Washington State making up the 	
balance. Black Press' revenue declined 3.5% in fiscal 2012 compared with 	
fiscal 2011, largely because of lower advertising sales, reduced printing 	
revenue due to the loss of a contract, and unfavorable foreign exchange. We 	
believe the company's key source of revenue, newspaper advertising sales, will 	
remain soft compared with historical performance. The reported EBITDA margin 	
declined to 19.4% in fiscal 2012 compared with 20.0% the year before. 	
	
In our base case scenario for Black Press in fiscal 2013, Standard & Poor's 	
expects:	
     -- Revenue to decline on an organic basis in the low-single-digit percent 	
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 not have a significant impact on margins this year; 	
and	
     -- Free cash flow to remain sufficient to support term loan amortization.	
	
While Black Press' debt balance declined in the fiscal year ended Feb. 29, 	
2012, from scheduled amortization payments and the cash flow sweep, EBITDA 	
also declined resulting in flat-to-weaker credit protection measures 	
year-over-year. This was in contrast to our previous expectations as we 	
believed the company would generate stronger credit measures through a 	
combination of higher EBITDA and lower debt. Adjusted debt to EBITDA of about 	
5.0x in fiscal 2012 is unchanged year-over-year; while EBITDA interest 	
coverage weakened to about 2.5x in fiscal 2012 from 3.2x in fiscal 2011 	
because of 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 Feb. 29 	
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 Feb. 29, 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. 	
	
Recovery analysis	
Standard & Poor's rates Black Press' senior secured bank facilities 'B+' (one 	
notch above the corporate credit rating on the company), with a '2' recovery 	
rating, indicating our expectation of substantial (70%-90%) recovery in the 	
event of a default. The bank facilities comprise a US$25 million term loan 	
A-1, a US$140 million term loan B-1, and a US$85 million term loan B-2. 	
	

Outlook	
The negative outlook reflects Standard & Poor's view of Black Press' 	
challenges, including our expectation of continued declining revenue and 	
margin pressure, as well as refinancing risk. We could consider lowering our 	
ratings on Black Press if the company is unable to refinance its senior 	
secured debt in a timely manner, if operating performance weakens more than we 	
expect, if adjusted debt to EBITDA is above 5.25x, or if there is less than a 	
15% EBITDA cushion within the financial covenants in the near term. We could 	
revise the outlook to stable after Black Press completes its debt refinancing 	
and 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	
Outlook Revised To Negative	
Black Press Ltd.	
                             To               From	
Corporate credit rating       B/Negative/--    B/Stable/--  	
	
Ratings Affirmed/Recovery Ratings Unchanged	
Black Press Group Ltd.	
Senior secured debt           B+               	
 Recovery rating              2                	
	
Black Press U.S. Partnership	
Senior secured debt           B+               	
 Recovery rating              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.
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