June 5 (Bloomberg) -- Philadelphia Media Holdings LLC lenders blocked a June 1 interest payment after the company, owner of the Philadelphia Inquirer, fell into technical default on loan covenants, Standard & Poor's reported.

The two sides are negotiating to resolve the default, Standard & Poor's Leveraged Commentary & Data said today, citing unnamed sources with knowledge of a Citizens Bank-led phone call Wednesday in which lenders learned of the missed payment.

The company is seeking an $8 million equity investment, S&P said. In January, Chief Executive Officer Brian Tierney warned of ``a dire situation'' if costs weren't cut by 10 percent by the ``summer or fall.'' He said the cuts were necessary to meet debt payments to lenders led by the Royal Bank of Scotland and Wachovia Bank. Tierney led the Philadelphia investors who bought the publications from McClatchy Co. in June 2006.

Jay Devine, a spokesman for Tierney, had no immediate comment.

Senior lenders, who blocked the payment to mezzanine creditors, want the closely held company to pay interest in kind on that debt, S&P said. Payment-in-kind is when a company makes interest payments with more debt instead of cash.

Royal Bank of Scotland underwrote $85 million in mezzanine debt in 2006 as part of the financing for the $562 million purchase of the Inquirer and the Philadelphia Daily News, S&P said.

To contact the reporter on this story: Sarah Rabil in New York at srabil@bloomberg.net

Last Updated: June 5, 2008 12:30 EDT