US CREDIT-Belo Corp. debt weakness seen persisting

From REUTERS

NEW YORK, Oct 2 (Reuters) - Belo Corp.'s (BLC.N: Quote, Profile , Research) debt protection costs may rise further as the family-controlled media group spins off its newspapers into a new company.

The media firm on Monday said it will spin off The Dallas Morning News, The Providence Journal, and The Press-Enterprise in Riverside County, California, into a new company called A.H. Belo Corp early next year. Belo will keep its 20 television stations and their Web sites. For details, see [ID:nN01267319].

Stockholders cheered the news by bidding up Belo's shares on Monday, having long clamored for the split on the grounds that Belo's broadcasting business was being undervalued because of advertising declines at its newspapers and a migration of readers to the Web.

But Belo's spin-off announcement was a strong blow for the firm's debt and credit investors.

Standard & Poor's cut Belo's ratings to junk territory, citing increased risks at the company, while Moody's Investors Service warned it may do the same soon. Moody's awards Belo a "Baa3" debt rating, which is one step above junk status.

The cost to insure Belo's bonds with credit default swaps jumped 35 basis points on Monday to around 154 basis points, which means it costs $154,000 annually to protect $10 million of its debt for five years. Belo's credit protection costs were roughly unchanged from that level on Tuesday.

But they are likely to rise further, according to Hale Holden, an analyst at Barclays Capital in New York.

Holden said in a report on Monday that Belo's debt protection costs could rise another 50 basis points. "We think (Belo's credit default swaps) should trade at about 200 basis points," he said.

Jake Newman, an analyst at research service CreditSights, said in a report on Tuesday that, "Much of the damage to bond spreads has already been inflicted, but we would recommend an underweight."

For one thing, S&P and Moody's both said they were concerned about higher financial risks at Belo following the spin-off of the publishing assets.

"The plan will result in a significant increase in Belo's leverage as all of the existing debt will remain with the company to be supported by the broadcast operations," Moody's said in a statement.

"Bondholders will be hurt in the split," CreditSights' Newman said. "There will be less cash flow to service the debt."

But some analysts also believe that the spin-off is just the first step in a sale of the TV assets and recapitalization of the newspaper assets.

"Creditors will be leery of the television company," Newman said. "Creditors may also fear a leveraged buyout of the television group."

Barclays' Holden, for example, said the spin-off was a reversal from the company's previous public comments.

Belo Chief Executive Robert Decherd "has historically said that the only rationale for a separation was an eventual sale of the company," Holden said in a report.

Belo executives on Monday said that the two Belo companies have no plans to sell themselves.

But even if any such moves eventually occur, they may not happen in the near term.

CreditSights' Newman said the nature of the spin-off, which involves a tax-free distribution of A.H. Belo shares to Belo Corp. shareholders, makes that difficult.

"The provision that allows a tax-free spin-off to the current owners would not allow a tax-free spin if the subsequent sale could be construed as part of a larger plan to dispose of the assets tax-free," he said.