• Newspaper publisher has $246.3 million in debt maturing 2017
  • Declining revenues due to rise of digital media affecting cash

Postmedia Network Canada Corp., the country’s largest English daily newspaper publisher, had its credit rating cut on concerns that high interest costs and low cash flow will leave the company unable to service its debt.

Standard & Poor’s on Monday reduced Postmedia to CCC+, five levels above default, from B- on the expectation that its estimated cash flow will be insufficient to service C$329 million ($246.3 million) in debt maturing in August 2017 and $269 million maturing in July 2018. Postmedia estimates C$82.0 million in free cash flow for that year, according to data compiled by Bloomberg.

"The key for us is really the risk associated with that refinancing in 2017, particularly if earnings continue to decline because the earnings that we currently see from the company are not substantially higher than what see as the company’s fixed charges," said David Fisher, the S&P analyst who rates the company, by phone from Toronto.

A representative from Postmedia, which publishes papers including the National Post and Calgary Herald, wasn’t immediately available to provide a comment.

Stabilize Earnings

The Toronto-based publisher, majority-owned by U.S. hedge fund GoldenTree Asset Management, has struggled with declining circulation and advertising revenue as digital media cuts into traditional earnings sources.

The company needs to demonstrate that it can stabilize earnings at about C$100 million ($74.9 million) or more after restructuring charges in order to refinance, Fisher wrote with analyst Stephen Goltz in the ratings decision. Postmedia’s ability to stabilize its business profile will become apparent over the next year, the analysts wrote.

S&P could revise its outlook on Postmedia to stable from negative if the company reduces its revenue declines to less than 1 percent annually and generates earnings of more than C$125 million for a sustained period of time, Fisher and Goltz wrote. Print advertising revenue decreased 17.9 percent for the fiscal year ended Aug. 31, excluding the impact of the acquisition of more than 170 Sun Media Corp. newspapers and publications from Quebecor Media Inc., according to company financial documents.

"I think what we’d have to see is both the print advertising revenue kind of stabilizing and then some growth in digital revenue to offset most likely continued declines in print advertising revenue," Fisher said.

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