According to the stockmarket, investors have found the first major UK victim of the downturn in print – no its not the Independent newspaper’s two editions – weekday and Sunday – we are talking about a listed entity where the market reckons there’s no hope for survival, other than collapse, investor wipeout and radical restructuring.
It is major UK regional publisher, Johnston Press whose shares have plunged 90% or more in the past year and at the close on Wednesday was worth a whole 10.5 million pounds, supporting 220 million pounds of bond debt and other liabilities. The shares fell more than 4% overnight to end at 10p each, just above the all time low of 9.58p hit earlier this month.
There’s brave talk from Johnston about how it is going to raise millions of pounds and use that money to buyback some of that 220 million in debt – which trades at a discount of 40% to face value, according to UK analysts. By buying the bonds more cheaply than their face value, Johnston’s management hope to generate profits. But in the end they are paper profits, and besides other creditors might have something to say about the company using funds to benefit just one class of creditor.
Moody’s Investors Service Monday downgraded the credit rating of Johnston Press bonds from Caa1 to Caa2 – the third lowest possible ranking – and changed its outlook on the rating from stable to negative – meaning the situation will get worse, not better. While Moody’s is a credit rating group, its words on Johnston Press’s immediate outlook are not encouraging:
“While Moody’s notes the good performance of the newly acquired “i” business, it is outweighed by the slowdown experienced by the rest of the company. Given the structural challenges of the print industry as well as the uncertainty over advertising demand in H2 2016, we believe that the company liquidity profile is weak with meagre to neutral adjusted free cash flow generation expected in 2016 and heightened risk of a breach under its RCF covenant as this continues to tighten.”
Johnston Press owns more than 200 titles including The Scotsman, and the Yorkshire Post and i, the southern UK paper it bought from The Independent before it stopped publishing. It has started closing papers it deems to be uneconomic (really to cut its costs and to generate cash for the great bond buy back) and is selling one group of papers in southern England.
Two weeks ago Johnston Press cut the value of its local newspaper business by almost half – by 224 million pounds ($A338 million). That left the publishing unit with a written down carrying value of 259 million pounds ($A435 million) and print assets of 20 million ($33.5 million).
The bond buying exercise sounds right wheeze. As Moody’s pointed out it will only make it harder for Johnston Press to restore confidence in the newspaper group. Moody’s said a deal like this could trigger a default on its debts.
It said: "As per [Moody’s] standard definition of default, purchases of debt at a discount to par might be seen by the rating agency as amounting to a distressed exchange."
In fact the most likely outcome is for the holders of the bonds to take control of the company before any debt deal so as to avoid any possible default and either force restructuring or close it down and try and generate some income. The bonds currently have a market value of around 136 million pounds ($A228 million). Even that much reduced amount is beyond a company whose market value is around $A17-$A18 million.
