Updated List of Most Distressed Credits

Includes: AA, GCI, MNI, RMIX, SMTC
by: Research Recap

Newspaper company McClatchy (MNI) tops CreditSights’ latest list of most distressed credits among US industrial businesses. However, in a July 21 report, CreditSights upgraded McClatchy to marketweight after the company “logged awe-inspiring cost cuts that lifted the company out of the mire of perceptions that the company could violate its bank financial covenants in 2009.”

We change our short-term recommendation on McClatchy to marketweight because the company’s cost reduction gives it more time to use other options to reduce debt, but longer-term we will need to assess the ability of management to sustain cost-reductions to offset secularly declining revenue.

PaidContent reports that “While many observers argue that recent profit swings for Gannett (NYSE: GCI), McClatchy (NYSE: MNI) and other newspaper publishers will be short lived, Ariel Investments CEO John Rogers Jr is far more bullish. In fact, Rogers tells Bloomberg that he expects the newspapers to defy analysts’ dour projections and post profits for the next five or six quarters.” [Rogers is one of the largest investors in Gannett and McClatchy.]

The North American Industrial Credits to Watch List uses CreditSights’ BondScore Reports screening tool to identify candidates in each of the following screening categories: the most distressed credits, the steepest six month improvement, the steepest six month deterioration, and the most likely ratings transition candidates.

US Concrete (RMIX) has shown the most deterioration over the last 6 months, while SMTC Manufacturing (NASDAQ:SMTC) has shown the greatest improvement.

Alcoa (NYSE:AA) is the leading candidate for a ratings downgrade, based on the difference between CreditSights Bond Score rating and its agency rating. In a July 9 report on Alcoa, CreditSights said that

“While AA’s liquidity position remains healthy, it continues to burn cash and has significantly higher pension and debt obligations over the upcoming years. We are affirming our underweight recommendation”

The full list is available here.