Unexpectedly Intriguing!
12 July 2007

Wow, that was fast! Just yesterday, we were looking at the fading fortunes of the New York Times and today, we find out that the mainstream media company's long-term bond rating has been cut from BBB+ to BBB by Standard & Poor. (HT: Michelle Malkin and Thomas Lifson).

Now, if you're like most people, that bond rating talk is just so much gibberish. In school, there's not that much difference between a B+ and a B, so how is this any different?

Truthfully, there really isn't all that much difference between these two bond rating levels. What it does mean is that now, it will cost the New York Times slightly more to borrow money, as investors will demand slightly higher interest rates on bonds issued by the New York Times to justify the slightly increased risk of holding its debt. The risk for bond investors has increased, in the judgment of the bond rating services, since their analysis suggests that the New York Times Company and its management will be less able to generate revenue going forward.

How much more will it cost the New York Times to borrow money? Glad you asked! As it happens, we created a tool for guesstimating the cost of corporate credit, which we can use to answer this question! We've updated it with the latest data below so we can find out:

Corporate Bond Data
Input Data Values
20 Year AAA Composite Bond Rate (%)
S&P/Moody's Corporate Bond Rating

Bond Rate Estimates
Calculated Results Values
Selected 20-Year Composite Corporate Bond Rate Estimate (%)

Using the values above, with the before and after bond ratings for the New York Times, we find that the effective interest rates that investors are now demanding from the company and its management have risen from 6.99% (BBB+) to 7.17% (BBB). That's not that big of a change.

Where this really matters though is on the New York Times' bottom line. Using our tool for paying off a loan, we find that at 6.99%, taking a million dollar "loan" over 20 years will require the New York Times' management to pay a total of $1,858,277.11 in principal and interest over the life of the loan. At 7.17%, this figure increases by $27,009.25 to $1,885,286.36.

That's still not that big of a change. Of course, should the New York Times' financial situation worsen enough so that it needs to restructure and refinance the debt that it already has issued through corporate bonds at lower interest rates, that action would have a large impact on the company's financial health. There is, after all, a huge difference between the interest payments required by a bond issued at 7.17% compared to one issued at say 6.17%.

And if the New York Times' ability to generate revenue deteriorates enough so that its bond rating falls to junk status (at BBB, it's now just two steps above junk status, which begins at BB+), the interest rate increases will become much larger as the company's bond rating becomes lower. This means that the corresponding hit to the company's bottom line would become much less trivial with every downgrade in its credit.

Go ahead and run the numbers for yourself above and see! For now though, we don't expect the change from BBB+ to BBB to have much impact on the ability of the New York Times to continue operating, nor do we expect that it will provide enough incentive for its management to change their course.

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