June 17 (Bloomberg) -- Los Angeles Times and Chicago Tribune controlling investor Sam Zell may be unable to stop the loss of advertising revenue leading him and other U.S. newspaper publishers closer to default on billions of dollars in debt.

Zell's Tribune Co., even with attempts to shore up the company's cash by selling assets and debt, could face default by the end of the year, Standard & Poor's analyst Emile Courtney said on June 13 in New York. ``In the absence of additional asset sales, we think that it's a possibility as early as December,'' Courtney said in a telephone interview.

Tribune may not be able to generate enough cash to meet the terms of loans that financed its Dec. 20 leveraged buyout, Courtney said. Gimme Credit LLC on June 6 called the debt situation ``deteriorating.'' It recommends selling Tribune bonds.

Industry print advertising sales suffered the biggest drop in at least 37 years in the first quarter, the eighth straight decline, as reported by the Newspaper Association of America.

Newspaper companies in danger of default include William Dean Singleton's MediaNews Group Inc., publisher of the San Jose Mercury News; Journal Register Co., the New Haven Register owner; and Florida Times-Union parent Morris Publishing Group, according to S&P's Courtney.

Insufficient Cash Flow

Philadelphia Media Holdings LLC, the publisher of the Pulitzer Prize-winning Philadelphia Inquirer, defaulted on $85 million of its debt when it failed to maintain sufficient cash levels to comply with loan agreements, S&P reported on June 5.

Failure to generate adequate cash may ultimately push some newspaper companies into bankruptcy, said Mark Young, president of Grist Mill Advisors, an investment bank in South Natick, Massachusetts, that specializes in media deals.

``These companies built their portfolios using leverage and executing a strategy with an investment thesis that was clearly flawed,'' Young said. ``Almost all of these are going to have to go through a restructuring or bankruptcy to come out the other side.''

From 2000 to 2007, publishers and would-be newspaper owners spent about $50 billion to buy up an assortment of standalone dailies and chains, according to newspaper broker Dirks Van Essen & Murray in Santa Fe, New Mexico. In that same seven years, industry advertising fell 6.8 percent to $45.4 billion, according to newspaper association data.

Lost Value

Publishers took on substantial debt for acquisitions only to discover they wouldn't have the cash flow to service it -- and in some cases, the assets would no longer have sufficient value to pay them off.

Journal Register, for instance, may be ``worth half of its debt,'' said Larry Grimes, who heads the media brokerage W.B. Grimes & Co. in Gaithersburg, Maryland. In a May 9 filing, Journal Register said it had $625 million in long-term debt at the end of 2007.

Newspapers are selling today for about six times earnings, said Sammy Papert, chairman of Belden Associates, a newspaper consulting firm in Dallas. This is below the 11.5 times earnings that MediaNews and Hearst Corp. paid in a $1 billion deal for the Mercury News and three other newspapers in 2006.

Since then, Denver-based MediaNews, the second-largest closely held U.S. newspaper company by circulation, had its credit rating slashed four levels by S&P to B-, or six levels above default. Debt rated B is likely to become impaired in adverse business, financial or economic conditions, S&P notes.

In Compliance

Singleton expects the company, with average weekday circulation of 2.6 million in fiscal 2007, to remain in compliance with debt covenants, the chief executive officer said in a June 12 telephone interview.

On June 30, if MediaNews has the debt-to-cash flow ratio of 6.53 times it reported on Dec. 31, 2007, it would be in violation of its loans, according to S&P.

Augusta, Georgia-based Morris Communications Co. -- owner of 13 dailies with 2007 revenue of $375 million -- may violate its debt agreement by Dec. 31, according to a May 14 filing with the Securities and Exchange Commission.

Newspaper companies are trying to conserve cash. Real- estate billionaire Zell, who led Tribune's $8.3 billion buyout last year, said on a June 5 conference call he plans to save money by cutting 500 pages a week at the company's newspapers.

MediaNews is sharing editorial content with other publications to save money, Singleton said. It has also cut pages and lowered the weight of its newsprint. ``We plan ahead,'' Singleton said. ``We've been doing that for 25 years. That's not going to change just because we're going through an economic downturn.''

McClatchy Workforce

Even media chains that aren't in imminent danger of default are reducing spending. McClatchy Co., owner of the Miami Herald and 29 other dailies, said yesterday it will cut 10 percent of its workforce to save $70 million annually.

Zell is looking to reduce Tribune's $13 billion in debt through sales, including a deal last month for Long Island, New York-based Newsday that valued the newspaper at $632 million. That sale, and a planned asset-backed commercial paper program, will bring in $900 million, enough to ``satisfy our principal- amortization requirements'' through the end of the year, Zell said on the June 5 call.

When asked for comment, Tribune spokesman Gary Weitman referred to an April 17 investor call, when Zell said, ``It does not appear that we will have difficulty meeting our commitments going forward.''

Distressed Debt

Even with the sale, Tribune may fall out of compliance with its debt requirements by the end of this year or early next, S&P's Courtney said. Chicago-based Tribune, the second-largest U.S. newspaper company, had debt of 8.1 times its cash flow at the end of the first quarter and must keep the ratio below 9 times for the rest of the year, according to CreditSights Inc., a bond research firm.

Tribune's $450 million of 4.875 percent notes due in 2010 traded last week at 69.5 cents on the dollar to yield 23.7 percent, or 20.7 percentage points more than similar-maturity Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Bonds are considered distressed -- an indication investors are concerned the issuer will default -- when they trade at a yield 10 percentage points above similar-maturity Treasuries. The same is true for loans trading below 80 cents on the dollar.

Senior creditors of Philadelphia Media, which paid $515 million for the Inquirer and Daily News in 2006, blocked the media company's June interest payment, S&P's Leveraged Commentary & Data reported. The move followed Philadelphia Media technically defaulting when cash flow dropped below required levels.

Equity Infusion

Led by advertising executive Brian Tierney, the publisher is seeking an $8 million equity infusion, while negotiating with lenders on changes to its debt agreements, S&P said.

Jay Devine, a spokesman for Tierney, and Morris Publishing Chief Financial Officer Steve Stone declined to comment. Julie Beck, CFO of Yardley, Pennsylvania-based Journal Register, didn't respond to requests for comment.

Media and entertainment companies made up 44 percent of so- called distressed debt outstanding in May, the biggest share of any industry, S&P data show. The proportion of high-yield bonds trading at distressed levels swelled in March to its highest since 2003.

``It's inevitable that one or more of the many highly levered companies in this industry will get into trouble,'' said Goldman Sachs Group Inc. analyst Peter Appert in San Francisco. ``Whether that translates into bankruptcy, only time will tell.''

To contact the reporter on this story: Leon Lazaroff in New York at llazaroff@bloomberg.net; Caroline Salas in New York at Csalas1@bloomberg.net

Last Updated: June 17, 2008 01:27 EDT