PrintAugust 13, 2008
New York Times financial squeeze intensifies
Almost a year and a half ago, The New York Times Company (NYTCo) announced a large increase in the dividend paid to stockholders, a move difficult to reconcile with the rapidly declining business fortunes of the company. The only rational explanation for the move was to reassure members of the Sulzberger/Ochs family, who hold voting control of the board of directors thanks to a two-tier shareholding arrangement, despite owning a minority of the company's capital.
American Thinker has noted that the company is not generating enough cash to sustain the dividend without eating into capital accounts. And Wall Street analysis have also noticed.
Yesterday, Moody's Investors Services, which rates the debt securities of NYTCo (influencing the price investors are willing to pay) suggested that the company's rating could decline to junk status unless the dividend is cut. Common shares plunged in value. Bloomberg reports:
"They'd have potentially more cash available to fund investments and debt reduction,'' Moody's analyst John Puchalla in New York said in an interview. "Depending on how they use that cash that's freed up, that could be beneficial to the rating.''
Sarah Rabil of Bloomberg notes some very interesting verdicts provided on the company by markets:
Credit-default swaps used to speculate on New York Times' creditworthiness or to hedge against losses are trading as if the company already was rated junk, according to data from Moody's credit strategy group.
The contracts, costing $397,000 a year to protect $10 million in debt for five years, trade as if the company had a Ba3 rating from Moody's, three levels below its actual Baa3 rating, the data show. Moody's on July 29 changed its credit- rating outlook to negative on concern the advertising slump will worsen.
Standard & Poor's BBB- rating, on watch for a downgrade, already reflects the dividend's cost, analyst Emile Courtney said in an interview. Faster print-ad declines in the industry's worst slump on record could trigger a junk rating, the New York- based analyst said.
For a newspaper which usually champions the little guy, it is interesting to note who is suffering so far from the company's decline under the management of Pinch Sulzberger, the hereditary occupant of the publisher's throne.
-- Employees are being laid off and bought out, as the company tries to cut costs fast enough to keep up with revenue declines.
-- Bond holders have seen the worth of the company's debt decline. If they have to sell the debt securities of NYTCo, they will take a substantial hit.
Those bonds have fallen to 83.4 cents on the dollar from 94.2 cents in late 2007, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The spread more than doubled to 478 basis points. The bondholders are primarily insurance companies, including State Farm Life Insurance Co. Bank lenders include Bank of America Corp. and JPMorgan Chase & Co
Ordinary public shareholders have seen the value of their stock decline:
But family members, who hold their stock in a trust, and who have no interest in selling their shares on the open market, have seen their dividends rise almost a third.
They are the winners, as long as the company maintains its dividend. If and when the game is up, they can sell control of then company above market prices to a suitor like Google, Bloomberg, or even the New York Times.
Financial pain is for the little people at the New York Times Company, to paraphrase Leona Helmsley.
Pinch Sulzberger is in a bind. If he cuts the dividend, family members are likely to be unhappy, and they control his job security. But if he doesn't cut the dividend and the company does not dramatically improve its performance, then a junk bond rating will greatly increase the borrowing costs the company must pay on its debt, further worsening the downward financial spiral.
Hat tip: David Paulin
Pinch Sulzberger is in a bind. If he cuts the dividend, family members are likely to be unhappy, and they control his job security. But if he doesn't cut the dividend and the company does not dramatically improve its performance, then a junk bond rating will greatly increase the borrowing costs the company must pay on its debt, further worsening the downward financial spiral.
Hat tip: David Paulin
