DBRS Downgrades Tribune’s Existing Ratings, Assigns B (low) Issuer Rating, Among Others to New Debt

DBRS has today downgraded its ratings of Tribune Company’s (Tribune or the Company) MTNs and Debentures to CCC from B, and its PHONES – Exchangeable Subordinated Notes to CCC (low) from B (low). Additionally, DBRS has assigned an Issuer Rating to Tribune of B (low), and assigned ratings of B (high) and CCC (high) to the Company’s Secured Bank Debt and Unsecured Bridge/Notes facility, respectively. The trend on all ratings is Stable.

This rating action follows the recent completion of the second portion of the Company’s roughly $8.5 billion privatization that it originally announced on April 1, 2007. (DBRS downgraded Tribune’s ratings on April 2, 2007, following the announcement of this transaction. See DBRS press release on that date.)

DBRS notes that Tribune’s Issuer Rating of B (low) is based on a highly leveraged newspaper and broadcasting company that has experienced both structural and cyclical pressure in its newspaper operations in recent years.

DBRS expects leverage at Tribune approached roughly 10.5 times (x) gross debt-to-EBITDA (excluding PHONES) at the end of 2007, with debt levels expected to be roughly $12.5 billion, up significantly from $5 billion at the end of 2006. For 2008, DBRS expects roughly $1 billion in expected asset sale and other proceeds to be applied to debt reduction, which should improve the Company’s debt-to-EBITDA ratio, albeit somewhat modestly, to roughly 10.2 times. The debt ratio should improve because the Company has announced its intention to sell the Chicago Cubs and its 25% stake in Comcast SportsNet, and will receive other sale proceeds. Furthermore, DBRS expects Tribune free cash flow to be around break-even for 2008, which should allow the Company to continue to fund itself internally as higher interest costs are expected to be offset by the cancellation of its dividend and cash tax savings.

From a business-risk perspective, DBRS notes that Tribune continues to experience pressure in its Publishing operations, as a sharp decline in advertising linage (specifically in the national and classified categories) in 2007 and ongoing circulation erosion has more than offset its cost-cutting initiatives. This has caused further EBITDA pressure in 2007 (12% year over year for the nine months ended September 30, 2007), which was beyond the original DBRS expectations for 2007. While DBRS expects EBITDA pressure to possibly stabilize in 2008, with both Tribune’s Publishing and Broadcast and Entertainment operations benefiting from an election year, the structural pressures caused by advertisers continuing to shift their spending to different mediums and circulation erosion remain ongoing.

DBRS’s Secured Bank Debt rating of B (high) is supported by the strong, but not superior, recovery prospects for the roughly $9.5 billion of bank debt, given its security on the shares of Tribune’s operating subsidiaries, along with guarantees provided by these entities. The Unsecured Bridge/Notes rating of CCC (high) is one level below the Issuer Rating, given the significant value that is pledged to the secured credit facility, which ranks ahead of this $1.6 billion of debt. While not secured, this debt benefits from a junior guarantee from Tribune’s operating subsidiaries.

The DBRS rating of CCC on Tribune’s MTN and Debentures (roughly $1.2 billion) is two levels below the Issuer Rating. While it has the same security provided to the Secured Bank Debt (as part of its Negative Pledge), this debt does not benefit from a guarantee from Tribune’s operating subsidiaries and therefore ranks behind more than $11 billion of debt with modest recovery prospects. Finally, the DBRS rating on Tribune’s PHONES reflects the subordinate nature of this security and modest recovery prospects given the value of the Time Warner Inc. shares that this security is exchangeable into.

Despite the Stable trend, DBRS notes the potential for further pressure on Tribune’s business risk profile, the execution required to complete asset sales and the refinancing risk that the Company will face over the near term until 2010.

DBRS notes that following U.S. Federal Communications Commission (FCC) approval on November 30, 2007, and the subsequent solvency opinion, the second stage of the transaction closed late in December 2007. This consisted of: (1) Tribune merging with a wholly-owned subsidiary of an employee stock option program (ESOP) (Tribune is the surviving entity); (2) the remaining shareholders receiving $34 per share in cash (roughly $4 billion) and (3) Sam Zell purchasing from Tribune: (a) a $225 million subordinated promissory note and (b) a 15-year warrant for $90 million of Tribune. If exercised, the warrant would entitle Zell to purchase 43.5 million shares for an exercise price ranging from $500 to a maximum of $600 million. This initially represents 40% of Tribune following the completion of the merger.

DBRS notes the Company completed the first stage of its privatization in June 2007. This included tendering for 126 million shares at $34 per share, for a total of $4.3 billion, using proceeds from a new $8.028 billion credit facility. Additionally, as part of the transaction: (1) the Tribune Employee Share Ownership Plan (the ESOP) purchased 8.9 million shares for $28 per share in exchange for a $250 million note of the ESOP; and (2) Sam Zell invested $250 million for 1.5 million Tribune shares at $34 per share and a $200 million exchangeable note. In connection with the closing of the second stage, the 1.5 million shares were redeemed for $34 per share and the exchangeable note was repaid.

Note:
All figures are in U.S. dollars unless otherwise noted.