Saturday, April 26, 2008

Yikes! Tribune's debt way expensive to insure

TribCo debt expensive to insure

By: Ann Saphir April 25, 2008

(Crain’s) — Tribune Co. CEO Sam Zell last week told investors that despite “significant erosion” in the company’s financials, he’s confident he’ll make good on his $12 billion in debt.

But middlemen who provide these investors with a form of insurance against default — they aren’t buying it.

Bondholders who want to insure their investment in Tribune debt are being asked to pay among the highest rates in the country.

Sellers of so-called credit default swaps — used by bond investors to protect themselves in the event of a company reneging on its debt — are demanding an upfront payment of $6 million and $500,000 a year to guarantee $10 million of Tribune bonds for five years.

Those are “distressed levels,” says Matthew Mish, a credit strategist at Barclays Capital in New York, and they imply a 92% chance of default by 2013. That’s assuming bondholders would get 20 cents on the dollar if the company did default.

“Revenue trends this year to date are significantly worse than we expected,” Mr. Zell said last week on an hour-long call with 350 investors and other interested parties.

Still, he said, a slew of changes — from how ad sales people are compensated to newly hired key officers — are helping to right the ship. In addition, he said, Tribune is moving forward on its planned sale of the Cubs and is considering a sale of Newsday, assets that together are expected to bring in well more than $1 billion.

“From where we sit right now, it does not appear that we will have difficulty meeting our commitments going forward,” Mr. Zell said.

So far, the credit default market doesn’t reflect that optimism, with the cost of insuring Tribune debt hardly budging in the week since those comments.

The reason it’s so costly to insure Tribune debt against default is clear: The company, which took on most of its debt when Mr. Zell engineered a buyout in December, must pay more than $1.4 million in principal by June 2009, on top of an estimated $1 billion in interest expense. The company had $1.16 billion in cash flow last year.

Only a handful of other companies are in the same league, analysts say, and most of them were mired in the subprime mortgage crisis. Credit default swaps for ACA Financial Guaranty Corp. and Financial Guarantee Insurance Corp., both bond insurance companies, and subprime lender Residential Capital LLC, are trading at similar levels to Tribune. Just a notch below, credit traders say, are troubled amusement park operator Six Flags Inc. and Abitibi Bowater Inc., the biggest U.S. newsprint producer.

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