National Enquirer Owner Invites Default Talk: Corporate Finance

Just two years after emerging from bankruptcy, the publisher of the National Enquirer is being abandoned in the bond market on concern that competition from and will push it back into default.

American Media Inc.’s $470 million face value of bonds have lost 3 percent of their value this month, the worst performance among distressed issuers, even as the average bond yielding more than 10 percentage points above similarly dated Treasuries gained 4.6 percent, according to Bank of America Merrill Lynch index data. Standard & Poor’s downgraded the Boca Raton, Florida-based company one level to B- with a negative outlook last week as cost cuts and higher prices haven’t compensated for lower sales.

Sales and advertising at American Media have been squeezed by free celebrity news on the Internet. After emerging from a prepackaged bankruptcy in December 2010 that cut its debt from $1.23 billion, the company may struggle with its $494 million in remaining obligations that carry higher interest costs, according to Standard & Poor’s. The weighted average coupon on the company’s debt has increased to 11.95 percent from 8.88 percent in the fourth quarter of 2009, Bloomberg data show.

“They need to reduce the decline in newsstands sales, not just one quarter but for an extended period,” Hal Diamond, an analyst with S&P in New York, said in a telephone interview. “They’re not alone in the industry in terms of declining. The difference is their leverage and interest expense.”

Interest Coverage

Average earnings before interest, taxes, depreciation and amortization to total interest expense, a measure of a company’s ability to pay off short-term debt, is 9.6 times at public U.S. publishers with at least $100 million in total debt, compared with 1 at American Media, data compiled by Bloomberg show.

Cover-price increases for celebrity titles didn’t offset a 16 percent decline in newsstand sales, lowering circulation revenue by 1.4 percent last quarter.

“While the publishing industry has continued to see double digit declines in circulation and advertising revenue, we pride ourselves in our ability to react quickly to market changes and have been able to adjust our cost structure to maintain a consistent level of Ebitda at AMI, while maintaining the quality of the magazines that we publish,” Chief Financial Officer Chris Polimeni wrote today in an e-mail statement. “We have been able to sustain adequate liquidity levels to service our debt, operate well within our financial covenants, redeem $20 million of bonds and begin to invest in our new digital strategy. We are very excited about the hiring of Joe Bilman as the company’s chief digital officer and the implementation of our digital strategy, which has just begun.”

Leverage Ratio

The company’s leverage ratio, or debt divided by Ebitda, of 6.74 times in the three months ended June 30 is at the highest level in almost three years, data compiled by Bloomberg show. It could rise to 7.5 times in the fiscal year 2013, Diamond said.

American Media uses a different method for calculating Ebitda, so its leverage ratios vary from Bloomberg’s, Polimeni said in a telephone interview. For example, he said the company estimates its leverage ratio at 4.7 times as of June 30.

The company will violate a covenant on its $40 million revolving credit facility if senior debt leverage rises to 4.5 times starting in September 2013, Diamond said. That ratio increased to 3.78 in the three months ended June 30, from 3.27 a year ago.

The publisher had $24 million borrowed under the credit line on June 30, more than three times the $7 million at the end of the first quarter, according to an Aug. 15 regulatory filing.

Bond Prices

American Media has $365 million of 11.5 percent first-lien bonds due December 2017 and $105 million of 13.5 percent second-lien notes due June 2018, Bloomberg data show. The first-lien securities traded yesterday at 94.4 cents on the dollar to yield 13.5 percent, while the second-lien debt was at 78.6 cents on the dollar and yielded 19.9 percent, Bloomberg prices show.

Along with the National Enquirer, the company publishes Star, Globe, Soap Opera Digest and Men’s Fitness, according to its website.

Under a November 2009 agreement with Playboy Enterprises Inc., American Media took responsibility for the company’s magazine operations other than its editorial product, according to a statement at the time.

Digital Revenue

Digital advertising revenue, which includes online, mobile, tablets and video, represented 2 percent of operating revenue in the first fiscal quarter of 2013, according to the Aug. 15 filing. The company created a chief digital officer role to develop strategies for its websites, video and mobile applications in July.

“They were slow to invest in the Internet,” S&P’s Diamond said. “They were late to the game because of their financial situation.”

Readers interested in the kind of news carried by American Media titles such as the National Enquirer and the Star can often find it “a lot quicker” online, he said. Major competing websites for celebrity news include TMZ, Gawker, and

Online revenue is usually smaller for publishers that began in print, so profits from new online businesses may not offset losses at existing titles, according to Dave Novosel, an analyst at Chicago-based bond researcher Gimme Credit LLC. Internet ad revenue also tends to be lower than that for print, he said.

‘Premier Properties’

Celebrity titles made up 62 percent of the company’s sales last quarter. Single-copy sales accounted for about 77 percent of circulation revenue in the three months ended June 30 this year and last, the first quarter of American Media’s fiscal year.

“They have some really good flagship publications that should help the business even though there is going to be some declining subscription volumes,” said Greg Fraser, an analyst at Moody’s Investors Service, which rates the company B3, or six levels below investment grade. “As long as they maintain those premier properties, that’s going to help maintain cash flow in the business until they can make the inevitable switch to online.”

The company expects to increase operating income by $2.7 million by publishing 18 special-edition issues in its Celebrity segment, which includes the National Enquirer, Star, OK! Weekly and National Examiner, according to the Aug. 15 filing.

“The key is you need to attract users by giving them something they can’t get elsewhere, or in another words, unique content,” Novosel said in a telephone interview. “You could argue the National Enquirer has unique content, but it’s a little different than what most people think of.”

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