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Papers' Dive Worse Than Expected

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CHICAGO In its latest broad survey of the industry, issued Wednesday, Fitch Ratings said newspapers are performing even worse than it expected at the beginning of the year.

The only good news the credit ratings agency could find is not likely to cheer newspaper CEOs: Fitch believes the current credit crunch will likely halt the highly leveraged transactions—think Sam Zell's takeover of Tribune Co.—that could be risky for bondholders.

"Fitch's outlook for the sector remains negative," the agency said in a report by analysts Michael Simonton and James Rizzo.

Fitch began the year with a negative outlook on the industry, arguing that weakness in newspapers' high-margin classifieds would bring soft revenue and put pressure on profits. Through July, the agency said, the sector's performance has been weaker than it anticipated.

July results from publicly traded newspaper companies, in particular, "are obviously cause for concern," Fitch said.

Among the specific companies it cites:

Gannett Co. where USA Today ad pages fell 17 percent compared to last year, and real estate classifieds at its community papers plunged 20 percent.

Tribune Co., where help-wanted classified tumbled 19 percent, and real estate shrank by 24 percent. (Fitch has Tribune on a "Ratings Watch Negative," anticipating a further downgrading of its credit.)

The McClatchy Co., where real estate collapsed by 26 percent, and automotive plunged 20 percent.

Dow Jones & Co., where ad volume fell 20 percent on a 75 percent tumble in technology-related ads.

Newspaper industry ad weakness, Fitch concluded, is "more secular than cyclical"—meaning much, if not all, of the declines could be permanent.

Fitch said it is true that the outsized declines in real estate are generally localized in newspapers serving markets such as California and Florida, where the housing bubble rose highest before bursting most dramatically. But that may not be the persuasive evidence of a cyclical downturn as it might first appear, the agency argued. Fitch noted that, broadly in the industry, classified revenue taken as a whole are down farther than real estate's contribution to the total would suggest they should be.

Continued declines in retail, auto, and help-wanted at a time when "key economic indicators for the U.S. economy have been broadly healthy for most of the year and as such should be supporting the retail, national and other classified categories," suggest a so-called secular, or permanent, decline in the important classified revenue stream, Fitch said.