Fitch Initiates 'BBB-' IDR on McClatchy; Outlook Negative.

CHICAGO -- Fitch Ratings has assigned a 'BBB-' issuer default rating (IDR) to The McClatchy Company (MNI). Fitch has also affirmed the 'BBB-' IDR and senior unsecured rating on the Knight-Ridder (KRI) debt that has been assumed by McClatchy and has removed those ratings from Rating Watch Negative. Fitch expects to rate MNI's bank credit facility 'BBB-'. The Rating Outlook is Negative. Approximately $5 billion in debt will be affected as of the close of the transaction.

The McClatchy Company

--Issuer default rating (IDR) assigned 'BBB-';

--Senior unsecured bank credit facility expects to rate 'BBB-';

--Commercial paper assigned 'F3'.

Knight-Ridder, Inc.

--Issuer default rating (IDR) affirmed 'BBB-';

--Senior unsecured bank credit facility withdrawn 'BBB-';

--Senior unsecured notes/debentures affirmed 'BBB-';

--Commercial paper rating withdrawn 'F3'.

The rating action follows MNI's announcement that it has closed its acquisition of KRI and has assumed approximately $2 billion in KRI debt. MNI utilized approximately $3.1 billion of capacity on its bank line to complete the transaction and expects to pay that down in the near term with approximately $1.4 billion-$1.5 billion in post-tax net divestiture proceeds. The transaction price represents an enterprise value to EBITDA multiple of approximately 9.5 times (x). MNI's management expects $60 million in cost synergies and has made significant progress toward its goal of selling 11 newspapers it deems as non-core and one that it anticipated might involve antitrust challenges.

The ratings reflect the significant debt load that MNI has assumed in order to finance this strategic acquisition, as pro forma debt levels constrain the company's financial flexibility and reduce its capacity to withstand a cyclical advertising downturn. Pro forma leverage metrics at the time of the close are outside Fitch's parameters for an investment grade company with MNI's business risks; however, Fitch believes the company is both capable of and committed to restoring its credit profile to investment grade levels in the next 18 months. The company's track record at paying down debt following its acquisition of Cowles' Star Tribune in Minneapolis in 1998, was given favorable consideration, although Fitch recognizes that the company faces a much more challenging environment during this upcoming debt paydown period as secular trends and stock price pressures could persist.

The rating reflects declining circulation trends for newspapers, pressures on newspaper advertising revenue streams with significant substitution risk and competitive threat from online rivals (particularly in high margin classified categories), volatile newsprint prices, and the affect of cyclical fluctuations on cashflow. The Negative Outlook reflects the risks of accelerated deterioration in the company's major markets which could further extend the timeframe for debt repayment, could place additional pressure on the company's stock price, and could increase the risk that the Board of Directors revises the company's financial policies to the detriment of bondholders. These concerns are balanced somewhat by the company's conservative culture, solid track record, favorable cash flow generating characteristics, strong margins relative to industry peers, geographic diversity in smaller growth markets, dual-class stock structure, adequate liquidity, and its collection of online properties. Longer term, Fitch believes the company will face challenges generating growth in print revenues and margins; however it is expected that MNI's assets can generate free cash flow through an economic downturn.

The company's conservative corporate culture is exhibited in its operations through the cost discipline that has helped the company post near-industry leading EBITDA margins (in the high 20% range) over the past several years. While margins have deteriorated significantly among many of its peers down over 500 basis points in some cases, MNI's tight cost focus has helped the company stem margin erosion with margins down only 130 basis points since 2002 while newsprint, benefits and energy costs have escalated.

MNI's strategy to drive revenues consists of concentrating in smaller markets with favorable population growth characteristics. Pre-acquisition, MNI's portfolio was positioned primarily in the northwest and southeast regions of the U.S. The 20 KRI papers that MNI will retain should complement the company's clusters in these regions and also expand its presence in the central U.S. While Fitch believes there are some operational efficiencies in terms of both costs and revenues that can be gained from geographic clustering, Fitch believes that the combined company's smaller markets are not immune to the secular pressures broadly facing newspaper companies (particularly in the national and classified categories). Circulation at MNI's properties was down 2.2% in the six months ended March 31, 2006, generally consistent with overall newspaper daily circulation down 2.5%. KRI's circulation was much weaker (driven primarily by larger market papers that are in the process of being divested), down over 4%. Ad revenue has also been under pressure with first quarter ad revenue was up only 1.4% at MNI and up 1% at KRI. April was soft, with ad revenues down 2.2% at MNI and down 1.2% at KRI, while May's advertising numbers were stronger, up about 5% at MNI and up 3% at KRI. Over the longer term Fitch anticipates that the combined company will be challenged to generate meaningful and consistent revenue growth and is cautious regarding its prospects for capturing and monetizing a significant volume of advertising dollars that are migrating toward the internet.

Pro forma for the acquisition at close but before synergies or divestiture proceeds, leverage as measured by debt-to-EBITDA, is above 5.0x. Pro forma for assumed synergies, and net divestiture proceeds, Fitch estimates that debt-to-EBITDA at the combined company would be slightly over 4.0x, which is considered high for the rating. Free cash flow to debt will be approximately 7.0%-10%. Fitch anticipates leverage to be below 3.5x by year-end 2007 as management has stated that free cashflow will be exclusively dedicated toward debt repayment until debt to EBITDA is under 3.0x. The Negative Outlook will be in effect until leverage metrics are more reflective of an investment grade newspaper company, understanding that given the multi-year debt paydown timeframe, if business risks accelerate beyond Fitch's expectations then more conservative financial metrics maybe required. While the Negative Outlook also incorporates the risk that the company could revise its financial policies given its weak stock price performance (down 18% in 2005 and down around 25% year-to-date), Fitch is less concerned regarding event risk related to financial policy revisions. The credit benefits of the company's dual-class stock structure, the board's long-term focus and management's conservative culture were demonstrated in 2005 as the company was leveraged below 1.0x debt to EBITDA during a period where its stock had fallen 18%. During that time, certain peers in the newspaper space and across the media industry instituted significant share repurchase programs and contemplated or enacted other forms of financial engineering while MNI abstained from such activity and maintained the financial flexibility which enabled it to pursue this KRI transaction.

The company has established a $3.75 billion credit facility, which should provide ample liquidity to complete the transaction and refinance KRI's near-term maturities. The facility is composed of a five-year $2.2 billion term loan A facility, a two-year $550 million bridge facility and a five-year $1 billion revolving credit facility. While it does not appear to be a near-term risk, Fitch recognizes that features of credit facility could have implications for the KRI bonds that MNI assumed as part of the acquisition as rating triggers in the facility could result in the borrower guaranteeing the facility. Credit facility financial leverage covenants of 5.5x debt-to-rolling latest 12-month (LTM) EBITDA, stepping down to 4.75x by year-end 2006, 4.25x by 2007 and 4.0x by 2008, provide both flexibility and a degree of visibility around maximum potential leverage in the coming years.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.