DBRS Confirms Tribune at B (low), Assigns Recovery Ratings, Changes Trend to Negative

DBRS has today confirmed the Issuer Rating of Tribune Company’s (Tribune or the Company) at B (low). Additionally, DBRS has assigned recovery ratings to Tribune’s specific debt securities and adjusted some of its instrument ratings. The trends on the Issuer Rating and instrument ratings are now Negative. These recovery ratings and the resulting instrument ratings are based on DBRS’s new Leveraged Finance Rating Methodology (see press release dated June 9, 2008).

Today’s rating action follows DBRS’s initial rating action on January 10, 2008 (see separate DBRS press release) that coincided with Tribune’s announcement in late December 2007 that it had closed its privatization to its employee stock option program (ESOP) and Sam Zell. The privatization valued Tribune’s equity at $8.5 billion, for a total enterprise value of approximately $13.2 billion.

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. The Negative trend reflects a continued weakening in its publishing operations, liquidity concerns including a sizable maturity profile over the next three years and some uncertainty on the timing of its asset sales.

From a business-risk perspective, DBRS notes that Tribune continues to experience pressure in its Publishing operations, as a sharp decline in advertising lineage and pricing (specifically in the national and classified categories) and ongoing circulation erosion continues to more than offset its cost-cutting initiatives. This has caused further EBITDA pressure in the latest 12 month period, to below $1.1 billion.

Under new management, DBRS notes that Tribune in attempting to manage its segments despite some cyclical and structural pressures. In Publishing, the Company is transforming the way it sells advertising and has focused on reducing both its content creation and production costs. In Broadcasting & Entertainment, the Company’s new management is attempting to drive advertising revenue growth while minimizing the increases in content costs. DBRS expects current trends to continue in Publishing (66% of total EBITDA) while its Broadcast/Entertainment segment should remain relatively stable with election and Olympic advertising benefits in 2008 likely offsetting advertising pressure due to the weakened U.S. economy.

DBRS notes that leverage at Tribune is high at 11.13 times net debt-to-EBITDA (excluding PHONES) at March 31, 2008. Furthermore, DBRS notes that the Company has $2.4 billion in debt that matures during the next three years (with $1 billion maturing in 2008) and will need to cut its capex levels in 2008 in order to be free cash flow breakeven. While the Company has announced a sale of its Newsday publication, which will generate $612 million of proceeds, the timing of its other planned asset sales is uncertain. DBRS has estimated that the Company could generate $1.3 billion in proceeds in 2008 from the sale of Newsday, the Chicago Cubs and its 25% stake in Comcast SportsNet should these transactions close in a timely fashion. (The Company is also likely to consider other asset sales and has announced it is in the process of establishing an asset-based commercial paper program for around $250 million that will help with liquidity.) While these sales would help to resolve its near-term debt maturities, the loss in EBITDA and pressure on its remaining operations is expected to mitigate significant improvement in its key credit metrics in 2008 and 2009.

DBRS has assigned Tribune’s Secured Bank Debt a Recovery Rating of RR2 and an instrument rating of B (high), which is two notches above Tribune’s B (low) Issuer Rating. This reflects the substantial recovery prospects as a result of (1) overall asset coverage of roughly 79% under a stressed default scenario; (2) a senior guarantee and a pledge of the Company’s operating assets and (3) secured leverage of 8.30 times gross debt to EBITDA at March 31, 2008 versus total gross debt to EBITDA of 11.35 times.

DBRS notes that while the next three levels of debt may rank differently from a legal perspective in terms of their position in a bankruptcy, DBRS’s analysis suggests that even in an optimistic default scenario, all three of the levels would expect to receive negligible repayment, if any.

The Unsecured Bridge/Notes, while not secured, benefit from a subordinated guarantee from the operating subsidiaries and have been assigned a Recovery Rating of RR6. This is given the fact that under a stressed default scenario, this debt would expect poor recovery prospects with all of the value pledged to the Secured Bank Debt. As a result, the instrument rating on this debt is CCC, two notches below the Issuer Rating.

DBRS has assigned a Recovery Rating of RR6 to Tribune’s MTNs and Debentures (roughly $1.4 billion) given their poor prospects for recovery. While this debt is secured by a pledge of the shares of the operating companies of Tribune, this debt does not benefit from a guarantee from these subsidiaries and therefore ranks behind more than $10.5 billion of secured and guaranteed debt. As such, this debt has been assigned an instrument rating of CCC, two notches below the Issuer Rating.

Finally, DBRS has assigned a recovery rating of RR6 to Tribune’s subordinated debt instruments (PHONES) as these would only be entitled to receive a distribution of assets under a restructuring once payments owed to senior debtors are paid in full. As such, DBRS has assigned an instrument rating of CCC to these securities, two notches below the Issuer Rating.

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