Fitch Affirms Knight-Ridder's Debt at 'A'; Outlook Stable from Negative.

CHICAGO -- Fitch Ratings has affirmed Knight-Ridder, Inc.'s (Knight-Ridder) 'A' senior unsecured debt rating and 'F1' commercial paper rating. The Rating Outlook has been changed to Stable from Negative. Approximately $1.5 billion of debt is affected by this action.

The current ratings reflect Knight-Ridder's solid interest coverage and strong cash flow characteristics. The rating also recognizes that Knight-Ridder possesses strong franchises in its local newspaper markets, good geographic diversity to its revenue and earnings streams, and a strong position in the developing areas of on-line information services and advertising. While debt/EBITDA leverage is somewhat high for the rating, the developing upturn in the advertising markets, supported by the steady expansion of the domestic economy, should provide Knight-Ridder an opportunity to maintain or improve key credit metrics.

The Stable Outlook reflects the improved operating environment for the company and management's indications that it plans to maintain debt at current levels over the forecast period, despite ongoing share repurchase activity. Knight-Ridder typically uses its significant free cash flow to support its active share repurchase program. Fitch believes that near-term credit risks principally relate to the possibility that excessive share repurchase could hinder the ability of the company to maintain its stable debt target. As Knight-Ridder's credit metrics are below average at the 'A' rating level, the inability of the company to maintain current debt levels could trigger a rating change.

Following three consecutive years during which Knight-Ridder's aggregate advertising revenues declined, advertising revenues are growing in 2004, and this trend is expected to continue. Through the end of May, advertising revenues have increased 2.0% in 2004, while the important classified category has increased 4.0% year-to-date. Classified advertising has been the weakest category over the period of the advertising down cycle, held back by the effect of the weak economy on recruitment. The resumption of solid growth in the economy is expected to provide sustained support for recruitment, as well as other newspaper advertising categories. Fitch believes that this provides Knight-Ridder the potential to gradually strengthen its credit profile.

With the exception of volatile newsprint prices, operating costs for the company are adequately controlled. Modest declines in full-time equivalents (FTEs) will partially offset increases in employee benefits costs. While newsprint costs, which usually represent about 20% of operating costs, are expected to increase in the high single- to low double-digit range in 2004, the effect of higher newsprint costs is mitigated by two factors: demand is an important driver of newsprint price so that prices often increase in response to strengthening advertising at the newspapers; and Knight-Ridder has important ownership interests in newsprint mills, which effectively hedges about 50% of the change in newsprint prices.

While increasing in 2004 as a result of major press projects in Kansas City and Detroit, capital expenditures over the long term are expected to remain at moderate levels relative to operating cash flow. Acquisitions of modest size are also expected over the forecast period. However, large acquisitions are not a focus of Knight-Ridder's strategy.

Fitch anticipates that, over the forecast period, interest coverage will approximate 10.0 times (x) and that, reflecting the company's strong free cash flow generation, cash flow from operations after capital expenditures will represent approximately 20%-25% of debt. Debt/EBITDA leverage, which at 2.2x is somewhat high for the A'' rating level, is expected to decline gradually as operating performance improves. Discretionary free cash flow is expected to be used primarily for share repurchase, consistent with maintaining stable debt levels.

Knight-Ridder's solid liquidity is supported by strong free cash flow and substantial availability under its bank facility. The $839 million commercial paper program ($358 million outstanding at March 30, 2004) is supported by an $895 million committed bank facility (five-year revolver expiring June 2006, with $468 million available) and a $200 million extendible commercial notes program (nothing outstanding). The company has no long-term debt maturities in 2004 and $100 million maturing in 2005.

Long-term concerns focus on newspaper circulation. Circulation for the newspaper industry in general and for Knight-Ridder's newspapers in particular has been on a gradual decline for several years. Recent efforts by Knight-Ridder to stem the loss of readership and support advertising rates through discounting have merely slowed the circulation decline, while reducing circulation revenues. Most recently contributing to the slide in circulation was the do-not-call legislation, which reduced the newspaper's telemarketing campaigns. The rapid growth of internet sites as sources for disseminating news and information is likely to continue the erosion of the newspapers' audience base.