Capital Markets

Philly Papers Default on Debt Payment

A flagging media company is gripped by a cash-flow problem.
Alan RappeportJune 6, 2008

Philadelphia Media Holdings, publisher of The Philadelphia Inquirer and The Philadelphia Daily News, defaulted on a June interest payment and is looking for new ways to repay its loans, according to a report by credit-ratings agency Standard & Poor’s.

The default was for the company’s $85 million in mezzanine debt underwritten by the Royal Bank of Scotland. The struggling newspaper group was created in 2006 when Brian Tierney — a colorful former advertising executive with local roots — and a group of investors bought the papers from McClatchy Co. for $562 million. A spokesman for Tierney did not immediately return a call for comment.

Senior lenders have proposed that the PMH temporarily pay interest on the loan in kind — with more debt, rather than cash — to preserve its cash flow. The senior lenders hold $295 million in loans, according to S&P. The company may also seek a reprieve from its required debt-to-cash-flow ratio, although it may have to pay a higher interest rate on the loans. S&P says the PMH is seeking an $8 million infusion of equity, but that it was unclear how that would be used to repay debt.

The default comes five months after Tierney warned of a “dire” situation if costs were not cut by 10 percent this summer or fall. In January he lamented to the local newspaper guild about the grim economy and problems making debt payments. At that time, he criticized the union for hampering the company from getting results and alluded to the possibility of outsourcing jobs overseas.

Tierney took over the PMH with much fanfare and some skepticism from journalists who worried about an advertising executive running the newspapers. In 2007 he published a special “When Pigs Fly” section celebrating an uptick in the Inquirer’s circulation after three years of declines; however, an April report by the Audit Bureau of Circulations showed that the paper’s paid daily circulation fell by 5.12 percent to 334,150.

The PMH has revamped its Website and taken innovative — and sometimes controversial — steps to raise revenues. Tierney was questioned last year when the Inquirer’s business section began publishing a column that was branded and sponsored by Citizen’s Bank. The company has also used gimmicks, such as recently publishing fake ads in the newspaper and online to test the results of its targeted advertising. The latest example is the Derrie-Air campaign, promoting a carbon-neutral airline that charges customers by how much they weigh.