Monday, April 7, 2008

Tribune May Need to Draw Down Bank Credit Lines

By Pierre Paulden and Shannon Harrington

April 7 (Bloomberg) -- Tribune Co. may need to draw down on bank lines to avoid default, causing a new drain on bank capital, according to Morgan Stanley analysts.

The company currently doesn't have enough cash and committed credit to cover debt repayments over the next two years and may have to resort to credit lines or ``potentially face severe financial difficulty,'' said Greg Peters, the head of credit strategy at Morgan Stanley in New York.

For lenders including Citigroup Inc. and Merrill Lynch & Co., prospects that the 80 companies with revolving credit lines of more than $1 billion will start drawing them down threatens to further erode balance sheets that have been hammered by losses from securities linked to U.S. home loans. Banks are restricting lending after $232 billion of credit losses and write downs from sub prime-mortgage related debt.

``There's a real game of chicken going on between banks and the corporations as to whether you should tap,'' Peters said on a conference call for investors today. ``This is a very big deal.''

Even if Tribune, bought by billionaire investor Sam Zell for $8.1 billion in June, taps its entire $750 million credit line, it still may not be able to pay back $1.85 billion of debt maturing in the next two years, the analysts said. They estimate that the amount of cash, cash equivalents and funding available on the credit line currently falls $664 million short.

Tribune spokesman Gary Weitman declined to comment.

Revolving credit lines can be reused once they've been repaid. Almost a third of U.S. banks are tightening loan standards and junk bond issuance has dropped 75 percent from 2007 levels, according to Morgan Stanley data. High-yield, high-risk debt is rated below investment grade and known as junk.

``High-yield issuance is a shadow of itself,'' Peters said. ``The numbers are nothing short of staggering.''

Drawing down on bank lines carries costs for banks and corporations, since they promise unattractive returns, Peters said. Companies that tap bank lines also risk breaking so-called covenants that restrict leverage and face higher interest costs.

Tribune's $750 million revolver was arranged by Bank of America Corp., JPMorgan Chase & Co., Merrill Lynch and Citigroup.

Tribune bonds due in 2015 have fallen 3 cents in the past month to 37 cents on the dollar, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority.

Trading on the Chicago-based company's $5.15 billion term loan has dropped 5 cents on the dollar over the same time period to 68.3 cents, according to Markit Group Ltd., a London- based company that tracks loan valuations.

To ensure debt payments, Tribune is selling the Chicago Cubs baseball team and its Wrigley Field stadium. Zell is also considering the sale of Newsday of Long Island, New York, and has had conversations with E.W. Scripps Co. about selling its 31 percent stake in the Food Network, the cable-TV channel.

``It's been mystifying to me all along why Zell chose to be so highly levered given what had been going on in the newspaper industry and in the general economy,'' said Robert Broadwater, managing director of the media investment bank Broadwater & Associates in Bronxville, New York. ``Having blue jeans, a motorcycle and a foul mouth doesn't seem to be quite enough to get it done, so far.''

``A credit crunch is upon us,'' Peters said on the conference call. ``If you actually need access to capital you're probably not going to get it.''

To contact the reporters on this story: Pierre Paulden in New York at; Shannon D. Harrington in New York at

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