S&P cuts Postmedia's credit rating, warns capital structure 'unsustainable'

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Standard & Poor's has downgraded Postmedia Network Inc.'s credit rating to the same grade assigned to ailing Greece, warning that the newspaper company could struggle to refinance its high-interest debt and calling its capital structure "unsustainable."

In explaining the downgrade, the ratings agency said Canada's largest newspaper chain, a subsidiary of Postmedia Network Canada Corp., should have enough cash to cover at least the next year, "which mitigates the likelihood of a near-term payment crisis."

But by downgrading the rating one notch to triple-C-plus from single-B-minus, S&P is signalling that Postmedia is vulnerable to the forces that have battered its revenue, particularly from print advertising, and sounding an alarm over its chances of reaching better terms on more than $670-million in debt. Absent an improvement on revenue and a turnaround on earnings, the company's ability to meet its obligations could be in peril.

S&P also lowered its issue-level ratings on Postmedia's first-lien debt to single-B from single-B-plus, and on its second-lien notes to triple-C-minus from triple-C.

"The downgrade reflects our view that Postmedia's capital structure is unsustainable in the long term," David Fisher, a Toronto-based credit analyst at S&P, said in a statement.

Under S&P's system, a triple-C grade suggests a company or sovereign nation is "currently vulnerable to non-payment," and depends on favourable business, financial and economic conditions to meet its obligations.

A Postmedia spokesperson declined to comment.

Canada's largest newspaper chain – which owns the National Post, Ottawa Citizen, Calgary Herald and Sun titles, among many others – has relentlessly cut costs, shedding jobs, centralizing production and selling real estate. Year-over-year revenue declines of between 8 and 13 per cent led the company to slash $131-million in annual costs over three years. Now, it is doing away with another $50-million in spending over two years.

Those cuts, as well as April's $316-million purchase of Sun Media assets from Quebecor Inc., are designed to shore up the company's cash flow so it can continue to service its debt. But the company is keen to refinance at better rates, having paid more than $69-million on interest in its 2015 fiscal year.

That refinancing could happen as early as next year, with the first tranche of debt, worth nearly $329-million and paying 8.25-per-cent interest, maturing in August of 2017. The remainder, priced at 12.5 per cent, matures in 2018. The main creditors are a pair of fund managers: Richmond Hill, Ont.-based Canso Investment Counsel Ltd. and U.S.-based GoldenTree Asset Management.

If Postmedia's revenue keeps eroding, S&P could lower the rating further, as "the refinancing risk associated with [the 2017] maturity would represent a credible potential default scenario," the agency said.

Its pessimism is driven partly by its expectation that the shift to digital revenue will continue to eat away at the company's returns, after Postmedia's digital revenue fell 2.4 per cent in its latest quarter.

In the past month, Postmedia announced a consolidated unit to create custom content for advertisers, called Postmedia Content Works, and earned a new partner designation from Google Inc., as it hunts for new digital revenue streams.

But it has also stepped back from certain elements of the ambitious "four-platform" redesign of its print and digital products rolled out since May, 2014. Postmedia has scrapped its expensively-produced evening tablet editions at the Citizen, Herald and Montreal Gazette, which had very low readership, and scaled back its smartphone apps to a more traditional feel.

For its credit rating to recover, Postmedia must first show that it has a realistic chance at refinancing, which would help give its digital initiatives time to pay off.

"We believe it will become more apparent over the next 12 months whether the company can stabilize its business to the degree necessary to facilitate a refinancing," S&P said in its statement.