Moody's (NYSE:MCO) is materially overstating the credit risk of The New York Times Company (NYSE:NYT) with its B1 rating. Our fundamental analysis highlights a much safer credit profile for NYT, whose stable cash flows cover all their obligations including debt maturities, except in 2016. Although NYT's cash flows would fall short of their 2016 debt maturity, their sizable cash on hand should allow them to cover this as well. They also have a robust 172% recovery rate on unsecured debt, which should allow them access to credit markets if they choose to refinance their debt. We, therefore, rate NYT five notches higher at an IG4 credit rating, or a Baa2 equivalent using Moody's ratings scale. (To register for free access to our corporate credit ratings, please click here.)
On the other hand, CDS markets are materially understating NYT's credit risk with a CDS of 51bps relative to an Intrinsic CDS of 219bps, while cash bond markets are accurately stating credit risk with a cash bond YTW of 2.676% relative to an Intrinsic YTW of 2.886%.
Cash Flow Profile
We produce a Credit Cash Flow Prime chart for The New York Times Company, as we do for every company we evaluate. The chart provides a far more comprehensive view of credit fundamentals than traditional ratio-based analyses. It shows the cash flow generation and cash obligations related to the credit of the firm, adjusted for non-cash financial statement reporting distortions from GAAP. The blue line indicates the gross cash earnings (Valens' scrubbed cash flow number) expected to be generated based on consensus analyst estimates and Valens Credit's own in-house research team. The blue dots above that line include the cash available at that time while the blue triangles indicate that same amount plus any existing, available lines of credit.
The colored, stacked bars show the cash obligations of the firm in each year forecast. The most difficult obligations to avoid are at the bottom of each stack, such as interest expense. The obligations with more flexibility to defer year to year, such as pension contributions and maintenance capital expenditures, are at the top of the stacked bars. All of the calculations are adjusted for non-cash distortions that are inherent in GAAP accounting, including the highly problematic and often misused statement of cash flows.
If the company generates and has cash levels that are above their obligations, the risk of default is extremely low. Even if the cash generated yearly is close to the levels of the stacked bars, a company generally has the flexibility to defer payments of various kinds. For example, they can allow assets to age a little longer, or they can cut certain maintenance costs such as maintenance capex. While decisions such as those can create other business concerns, the issue in credit risk is simply this: Does the company have enough cash to service their credit obligations?
NYT's cash flows would be able to service all operating obligations through 2022, indicating their operational sustainability. However, they face a material $189mn debt headwall this year that cash flows alone will not be able to service. That said, the firm's $613mn cash on hand indicates that they should be able to service the said debt maturity. Moreover, the company's positive net working capital levels and significant asset backing drives a robust 172% recovery rate on unsecured debt. The firm should, therefore, have no problems accessing credit markets to refinance, if necessary.
Like most people, senior executives and board members do what they are paid to do. This is why NYT's Form DEF 14A is key to understanding this company's fundamentals, something that credit agencies seem to be missing. Our Incentives Dictate Behavior analysis focuses on NYT's senior executive compensation and governance. This analysis is meant to help investors understand corporate governance, how aligned a management team may be with shareholder interests, and the potential consequences of a management compensation framework to the business.
NYT management's compensation structure should lead them to concentrate on growth. However, the compensation framework does not drive management to control leverage or improve asset utilization over time, which is particularly negative in a declining industry such as NYT's.
Additionally, with the firm controlled by the founding Sulzberger/Ochs family, who may not be aligned properly with either debt or equity investors, there may be risks to the firm's successful execution of their turnaround plan.
We provide analyses of companies' statements on earnings calls, termed Earnings Call Forensics™. This analysis is meant to help assess a management team's confidence in their conference calls when discussing certain areas of the business such as operations, stability, strategies, their ability to manage business risks, and especially, their liquidity and solvency.
In the case of NYT, the analysis of their Q4 2015 earnings call highlighted mostly highly questionable markers from management. Management appears confident when saying they will be able to reduce their cost base. However, they appear concerned about the sustainability of digital advertising revenue growth, and the sustainability of digital subscriber and mobile advertising growth going forward. They also appear to lack confidence in their ability to grow branded content into a larger percentage of their business.
Ultimately, a company's credit risk (or lack thereof) is driven by cash available against cash obligations. NYT's credit risk is being materially overstated by Moody's and materially understated by CDS markets. Given NYT's stable cash flows relative to operating obligations, healthy liquidity profile, and robust recovery rate, ratings are expected to improve while CDS market spreads are expected to widen once the company's fundamentals are recognized.
Our Chief Investment Strategist, Joel Litman, chairs the Valens Equities and Credit Research Committees, which are responsible for this article along with the lead analyst, Cheska Pablico. Professor Litman is regarded around the world for his expertise in forensic accounting and "forensic fundamental" analysis, particularly in corporate performance and valuation.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.