Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of
It has also revised the Rating Outlook to Negative from Stable.
The change in the Outlook to Negative is due to lower than expected FY21 and 1H2022 operating performance, driven by macroeconomic headwinds and related operational challenges, which drove Fitch-calculated leverage just outside its negative sensitivities. Fitch expects leverage to increase slightly then reverse over the next 18 to 24 months due to operating improvements and debt repayment.
Key Rating Drivers
Leverage Trend: Gannett's Fitch calculated leverage was 3.9x as of
Fitch takes significant comfort from Gannett's ongoing debt repayment, recognizing the company has repaid more than
EBITDA Margins to Improve: Fitch expects Gannett's EBITDA margins to improve by approximately 150bps through 2024 due to improved operating leverage from digital marketing solutions growth and targeted cost savings of between
Secular Headwinds: Gannett will continue facing negative secular headwinds in print circulation and readership driven by increasing digital news consumption and audience fragmentation, which will be a drag on total advertising revenues. While these headwinds are pandemic-related, it remains too early to determine if the accelerated declines will continue, which could preclude Gannett from returning to the pre-pandemic decline trajectory of high-single digit to low-teens.
Advertising Environment: Fitch is modeling a
Digital Expected to Drive Growth: Gannett's steady transition into the digital sphere via its digital marketing solutions and advertising segments are viewed as a credit positive as it counters the structural decline of its traditional print business. Fitch expects Gannett's digital revenue contribution to rise above 40% over the rating horizon, from 35% for LTM ended
Gannett's digital marketing services (DMS) offers the best growth potential given the large base of untapped SMBs despite an industry-wide elimination of digital marketing incentives. Prior to the pandemic, Gannett saw a significant increase in the number of annual events held and saw events return to prior growth trajectory in 2022.
Gannett Media Revenue to Decline: Fitch expects Gannett's Media segment to experience revenue declines of around 10% by financial year end (
Diverse Portfolio: As of
Parent Subsidiary Linkage: Fitch links and synchronizes the IDRs of
Derivation Summary
Gannett is a multi-media company consisting of publishing and digital media solutions segments in the
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
Revenue decline of approximately 7% in 2022 driven by macroeconomic weakness leading to lower advertising spend and 2% in 2023 due to continuing macroeconomic overhang. Thereafter, revenue grows by low single digits as DMS growth more than offsets continued print declines;
EBITDA margins to contract to 10.7% in 2022 due to a lower top line and then recover due to increasing operating leverage at DMS and renewed cost cutting efforts, reaching 12.7% by 2025;
Capex intensity at 1.3% of revenue;
Positive FCF generation over the rating horizon;
Asset sales totaling
No share repurchases or dividend payments over 2022 and 2023.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes Gannett would be considered a going concern in bankruptcy and would be reorganized rather than liquidated and assumes a 10% administrative claim.
Going-Concern (GC) Approach
Gannett's recovery analysis assumes the company is unable to grow its digital subscriptions, advertising, or media solutions business segments sufficiently enough to offset accelerated print subscriber and advertising declines. As such, the post-reorganization going concern EBITDA is
Fitch assumes Gannett will receive a going-concern recovery EV multiple of 4.5x EBITDA based on the following factors. In
Additional factors include NMIG acquisitions of several news, media and digital marketing providers for an average 4.1x multiple and Gannett in
Fitch estimates full recovery prospects for the first lien senior secured term loan and rates it 'BB'/'RR1', or three notches above Gannett's 'B' IDR.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The Outlook will be resolved once Fitch-calculated leverage declines below 3.5x;
Successful execution of strategic operating transformation leading to sustainable total digital revenue growth that meaningfully offsets the decline in legacy revenues;
Consistent EBITDA and FCF margin improvement;
Fitch-calculated leverage (total debt with equity credit/operating EBITDA) declines below 2.0x on a sustainable basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Digital revenue growth slows or declines and is insufficient to meaningfully offset print subscriber declines;
Fitch-calculated leverage exceeds 3.5x without a creditable plan to return leverage within sensitivities.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: As of
Maturities are manageable as the current first lien term loan matures in
Issuer Profile
Gannett is the largest
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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