20% chance Freedom Communications could default on its bonds

My favorite journalism blog is Reflections of a Newsosaur, by veteran journalist Alan D. Mutter. He devised a Default-O-Matic meter to graph which newspaper companies are closest to defaulting on their bonds.

The Default-O-Matic graph currently doesn’t include Freedom Communications, the parent company of The Orange County Register, where I wrote editorials for 19 years until taking a buyout nearly 2 years ago. But we can calculate it ourselves.

In June, Moody’s downgraded Freedom’s junk-bond rating to B2. So it’s the same as Gatehouse, meaning, according to the Default-O-Matic, a 20% chance of default.

It should be noted that this doesn’t mean Freedom will default. It’s only a historical percentage based on Moody’s experience with past companies holding B2 bonds. And as of June, at least, there was an 80% chance that it would not default.

Looming lawsuit

Another negative factor is that on Sept. 22 a $100 million labor lawsuit goes to trial against The Register: Paper carriers claim they were “wrongly classified as independent contractors, not employees.” The alleged offense occurred under Publisher Chris Anderson, who has moved on to become a journalism ethics professor at Arizona State University.

Here’s how I expect that one to go. A friend of mine was at the Arizona Republic newspaper in the mid-1990s when it was being prepared for sale by the Pulliam Family, which included ex-Vice President Dan Quayle. My friend said the company settled all lawsuits — sexual harassment,  carpal tunnel syndrome, stubbed toes, whatever — in preparation for the sale. That way the new owners, if a lawsuit carried over and resulted in a major settlement, couldn’t come back to the old owners and demand: “Give us more money because you didn’t tell us how bad this lawsuit would be.” The Republic ended up being sold to Gannett (current Moody’s bond rating: A3; a 0.6% chance of default on the Default-O-Matic.)

So, what I expect will happen in the lawsuit is that real close to the Sept. 22 trial date, Freedom Comm’s lawyers will say something like, “Look, if you win $100 million in this lawsuit, that only will bankrupt the company. Then you’ll get in line with all the other creditors. Or we can offer you $5 million right here.”

Carrier lawyers: “How about $10 million?”

Freedom lawyers: “How about $7.5 million?”

Carrier lawyers: “You got a deal.”

After the lawsuit

That will clear the decks for selling the company, probably by breaking it up and auctioning the pieces. It’ll be accomplished before Rudolph and Santa alight on your rooftop.

The Hoiles Family, one of the last of the old newspaper families, seems to have given up.

The TV and radio stations are worth something. The Register might be merged with the L.A. Daily News of Dean Singleton‘s MediaNews Group (current Moody’s junk-bond rating: B3; Default-O-Matic estimate of default: 26.4%). But I’m just speculating on that part.

What we’re seeing is the Cheyne-Stokes of the newspaper business. The Internet isn’t the future of news, it’s the present. Everything else soon will be gone.