McClatchy Company, 6.34% Yield-to-Worst Call, December 2017
In this week’s bond review, we enter the world of online media, specifically one company that is diligently working to make the transition from traditional news outlets to a digital-only presence in the news arena. The McClatchy company is aggressively building its digital news presence, with multiple increases in its digital metrics for its most recent quarter. In addition, the company is paying down debt and reducing expenses.
For Q3, McClatchy increased digital-only subscribers by 15.6% over Q3 2016.
Year-to-date, the company has reduced debt by $68.5 million.
Operating expenses were down 9.0% for the first nine months of 2017.
The company’s 2022 bonds, couponed at 9.0% and with a targeted yield-to-worst of about 6.34%, have been trading at a premium for quite some time. Priced at its current 6.34% yield-to-worst (Dec. 2017 call, at 104.5) these bonds still offer over 4x’s the 1.42% yield (as of Nov. 1, 2017) on a 1-year U.S. Treasury, and come in at 7.85% if held to maturity in Dec. of 2022. The addition of these notes to a well-diversified portfolio, such as our Fixed-Income 2 (FX2) managed income portfolio, provides additional diversification into the media industry. The third quarter-end 2017 performance of FX2 is shown below.
McClatchy’s most recent quarterly results show a company making progress on transitioning to the online environment. The company slowed the decline in adjusted EBITDA by nearly two-thirds from the first half of this year – down 7.7% compared to a 21% decline in the first half of 2017.
The company also made headway on a few other fronts as well. McClatchy repaid principal debt of $53.5 million in Q3. Year-to-date the company has reduced debt by a total of $68.5 million. This has been aided by the sale of non-essential real estate assets which the company has used the proceeds to reduce debt. Revenues continue to reflect the move to digital media, as the company logged 76.2% of total revenues exclusive of print newspaper advertising – up from 72% in Q3 2016. Finally, in many of its digital / online media metrics, McClatchy showed outstanding growth, which is discussed later in this article.
About the Issuer
Founded in 1857, the McClatchy Company has experienced over a century of growth fueled by the acquisition of quality media companies in growing markets across the country, including the 2006 purchase of Knight Ridder, which made McClatchy, at that time, the second largest newspaper publisher in the United States. Today, McClatchy operates a leading local media company in 29 U.S. markets, connecting with our communities through print, digital, mobile apps, and more. McClatchy owns and operates newspapers such as the Sacramento Bee, the Kansas City Star, the Miami Herald, the Idaho Statesman and many more.
The company’s primary sources of revenues are print and digital advertising. Retail advertising revenues include advertising carried as a part of newspapers (run of press (“ROP”) advertising), advertising inserts placed in newspapers (“preprint advertising”) and/or advertising delivered digitally. Audience revenues include print and digital subscriptions or a combination of both. Other revenues include primarily commercial printing and distribution revenues.
Growth in Digital Revenues and Access
McClatchy showed definite growth in its online / digital offerings in the third quarter as well as year-to-date. In the third quarter, the company reported the following:
Digital-only revenues grew 8.2%.
At the end of Q3, the number of digital-only subscribers was 98,800, an increase of 15.6% from Q3 2016. This was despite loosening paywalls on the East Coast to make news information more widely accessible during coverage of Hurricane Irma.
In Q3, average total unique and local unique visitors to McClatchy’s online products were 78.3 million and 18.0 million respectively, which represents growth from a year ago of 23.3% in total unique visitors and 19.4% in local unique visitors.
Mobile users accounted for 62.8% of average total unique visitors in Q3 versus 56.7% in Q3 2016.
Digital-only employment advertising grew 13.2% in the third quarter compared to 9.3% in the first half of 2017.
In Q3, video revenue across the company grew 56% and video views were up 78% over last year.
McClatchy also displayed solid growth in its digital offerings for the first nine months of 2017.
For the first nine months of 2017, digital-only ad revenues grew by 9.9% when compared with the same time period in 2016.
For the first nine months of 2017, digital-only audience revenues were up 5.6% over the same period in 2016, mainly attributable to an increase in digital-only subscribers.
The Move to Digital Media
Accessing news online or via a mobile device continues to evolve and more importantly, become predominant among all age groups.
A recent study shows that between 2016 and 2017, the gap between television and online news consumption has decreased from 19 points to 7 points. As of August 2017, 43% of Americans report often getting news online while 50% often get their news from television.
As this graphic illustrates, the share of Americans who primarily access news from their TV – including local TV news, nightly network TV news and cable news – has decreased, while the portion of Americans often getting news online has increased.
In addition, the move to accessing news on mobile devices continues to increase as well. As of spring 2017, 45% of American adults often get their news on a mobile device. This is up from 36% in 2016 and 21% in 2013. A big driver of the recent increase over 2016 are older adults. Roughly two-thirds (67%) of U.S. adults age 65 and older now get news on a mobile device. This represents a 24% jump from 2016.
While older Americans are joining their younger counterparts in accessing news “on the go” a recent study also shows that younger Americans are leading in their willingness to pay for online news. In the U.S., the proportion of people ages 18 to 24 paying for online news rose from 4% in 2016 to 18% in 2017.
All of these trends bode well for those companies who are looking to increase their online presence. McClatchy is one such company. As Craig Forman, CEO of McClatchy has stated, one of the company’s current mandates is to accelerate the pace of its digital transition.
In its most recent earnings call, Craig Forman, McClatchy’s President and CEO outlined the company’s expectations for the remainder of 2017.
Continued growth in digital-only advertising revenue, finishing 2017 in low double digit range for growth.
The company will continue to reduce operating expenses in the fourth quarter, with expectations that these will be down in the mid to high single digit percentage range as earlier cost saving efforts take hold in the fourth quarter.
Maintain focus on monetizing real estate assets. The proceeds can be used to pay down debt (de-lever the balance sheet) and / or for further business investments.
Financials / Interest Coverage and Liquidity
Interest coverage is of paramount importance for bondholders as it indicates the ability of the issuer to service its debt. For its most recent quarter, McClatchy recorded adjusted EBITDA of $34.6 million and interest expense of $19.8 million. This calculates to an adjusted EBITDA / interest ratio of 1.7x. McClatchy also maintains sufficient liquidity to meet cash flow needs. As of September 30, 2017, the company had $84 million in cash with another $65 million available from the company’s revolving credit line, for total liquidity of $149 million.
McClatchy has made progress in moving its operations online, but the risk for bondholders is whether it can continue on this trajectory and continue to increase its online revenues. The company registered impressive increases in Q3 in many of its online / digital metrics. It has also slowed the rate of decline in its adjusted EBITDA in its latest quarter. This, coupled with the company’s increases in its online presence may be a turning point for this legacy news/ media giant. McClatchy’s 2022 bonds have been trading at a premium for quite some time – with a 9.0% coupon that is obviously popular with investors. And while the yield to worst is hovering around 6%, this still represents a solid return and outweighs the risks identified.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
Like many legacy newspaper companies, McClatchy has faced challenges in the transition to online-focused readers / consumers. There is good news in that it has slowed the decline and made solid progress in many of its online initiatives. The company remains focused on driving more content online and doing it at an accelerated pace. With the seemingly unstoppable march toward online-only news sources and more people accessing news on the go via mobile devices, McClatchy remains boldly committed in its move away from traditional print news and advertising and moving to a digital-only platform. With the maturity of these 2022 bonds still five years away, the company should have ample time to address revenue, profit and cash flow to ensure bondholders are covered. For these reasons, we have identified McClatchy’s 2022 bonds as an excellent addition to our FX2 managed income portfolio, the benchmarked third quarter-end 2017 performance of which is shown above.
Issuer: McClatchy Company
Ratings: B1 / B
Yield to Worst Call: ~6.33% (104.5 call, on 12/15/17)
Yield to Call: ~7.12% (103 call, on 12/15/18)
Yield to Maturity: ~7.85%
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