Follow the Money: Star Tribune's debt selling at less than 60 cents on the dollar

The newspaper's lien value has plummeted over the past year, showing flagging investor confidence

A year ago, investors were so sure that the Star Tribune was financially solvent they were actually willing to buy its debt for more than it was worth. A dollar's worth of Strib debt cost $1.01.

Today, creditors are looking to offload that debt at a dramatic discount, for as little as 55.5 cents on the dollar.

On Sunday, the New York Post reported that the Minneapolis daily was on the verge of bankruptcy, a charge that Publisher Chris Harte promptly denied. Nonetheless, Harte acknowledged that the paper had brought in the Blackstone Group to help restructure the newspaper's finances.

The rumors of financial trouble triggered a drop in value but also brought into harsh relief what financial insiders have known for several months: There is a high risk the Strib won't be able to pay creditors.

"Star Tribune investors are weary from a string of negative news—both company-specific and industry-wide—following the credit's syndication in February 2007, near the market peak," reported Standard & Poor's Leveraged Commentary & Data service on Monday. (LCD is one of the leading information providers to the financial community.)

So-called "leveraged debt" is considered high risk. Nervous creditors can sell off debt at a discount and get immediate cash. Investors looking for value buy up debt cheaply and take the risk of default in exchange for potentially rewarding returns.

Although the Strib was once considered a good long-term bet, its debt price has been in free fall since June 2007. The price for the company's first-lien debt—the lower-risk debt that gets paid back first in the event of a default—was at a steady 91 cents in July. It dipped to 84 cents in October. The most recent bad news brought the price as low as 55.5 cents on Monday, May 5—nearly half its value 14 months ago. This is a "distressed level," according to industry sources, and reflects substantial doubts that the company will make good to its creditors.

Compare this to March 2007, when investors first began purchasing the debt at prices at or above the debt's monetary value. The market conditions were so exuberant that investors were willing to pay more than face value, banking on making money via interest. Amazing as it sounds, the supply of debt was that low, and buyers were hungry for what they saw as a growth opportunity.

Timing has been against Avista Capital Partners—the private equity firm that purchased the newspaper from McClatchy in 2006 at a price of $530 million—from the beginning. To complete the purchase, Avista arranged a $486 million loan package from Credit Suisse and Royal Bank of Scotland, a transaction that occurred at the peak of the bull market. At the time, debt was trading at a roughly one-to-one basis. In fact, on the day the Strib loan went through, an average investor would spend $100.75 to buy $100 of debt.

That average figure is now $92.86 for $100 today, which shows both how the market has softened and how much the Strib's debt has been devalued compared to the average loan.

Conventional wisdom among investors seems to hold that the Star Tribune's business arm is too weak to support the current debt load. Debt trading at this price, a financial industry source says, indicates a "serious risk" of fundamental restructuring that might potentially include a bankruptcy filing.

The situation could get worse. Currently, analysts say that a particular belief held by some investors—that Avista might pump more cash into the Strib—is propping up the price. There is precedent for this, since the private equity firm has taken similar steps with other investments. But if that proves not to be the case, the price could tank as investors lose confidence.

This is not necessarily a death knell. Goldman Sachs just sold Chrysler debt at 63 cents on the dollar, and no vultures have yet started to circle the automotive giant. But it is a sobering indicator of flagging investor confidence in the Strib's ability to pay debts.

 
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