Corporate Finance | S&P Considers Cutting Bond Rating for News Corp

According to corporate finance watchdogs, with News Corp. (NWS) showing record-high credit-default swaps in comparison to other media concerns — and in the aftermath of the phone-hacking scandal — Standard & Poor’s may end up cutting down the publishing giant’s bond rating.

Corporate Finance | News Corp’s Rising Problems

News Corp, which owns Fox TV Networks and the Wall Street Journal among others, saw its cost of protecting debt from default skyrocket from 58 basis points at the beginning of July to 142 days as July 19^th, with a rise of 10 basis points for the average contract on Rupert Murdoch’s company and its four rivals. Relative yields on News Corp.’s bonds have undergone a raise to 31 basis points, while those of similar media peers widened by one basis point, according to Bank of America Merrill Lynch index data.

S&P has released a statement that it is considering lowering the New York based News Corp.’s BBB+ corporate credit rating following enhanced “business and reputation risks” for the media company arising from legal inquiries into the phone-hacking scandal focused on the now defunct News of the World newspaper. This news may shock many as this review comes only five days after S&P stating that the outlook was stable.

If corporate finance experts are to be believed, News Corp. needs to worry more about public opinion right now, as that is a bigger headwind. Other corporate finance and asset management experts have stated that while direct financial ramifications may be indiscernible as of now, the purported damage to reputation is the larger risk.

Most on Record

Corporate finance analysts have observed that credit-default swaps on News Corp.’s News America Inc. unit are the highest on record, as compared to the average contract on the debt of competitors.

News Corp. has $15.5 billion of long-term borrowings, according to data compiled by corporate finance specialists Bloomberg.

Contracts that protect debt issued by News America, which promise the buyer face value payment (after subtracting the value of the defaulted debt) if a borrower fails to meet its obligations, have almost doubled since July 13, piling on 64 basis points to reach a record high since April 2009, according to CMA. One basis point stands for $1,000 annually on a contract protecting $10 million of debt.

The contracts fell four basis points to 136 basis points as of 11:46 a.m. in New York, after earlier climbing as high as 145, according to broker Phoenix Partners Group.

‘Healthiest Balance Sheets’

News Corp. however has released a statement that the company’s balance sheets are the healthiest in the business and any worries about its inability to address its debt are without basis.

Revelations that reporters from the News of the World hacked into dozens of telephone messages left for people including celebrities, members of Prince Charles’s staff and a murdered schoolgirl forced octogenarian media mogul Rupert Murdoch to shut the newspaper and abandon a plan to purchase the 61 percent of British Sky Broadcasting Group Plc that he didn’t own.

The company’s long-term debts are up from $13.2 billion as of June 30, 2010, the end of its previous financial year, as stated by a regulatory filing. Revenue has dropped to $8.2 billion in the first calendar quarter from $8.8 billion the year before, the filing further states.

Independent corporate finance analysts, however, are advising against panic as this whole thing may just blow over without causing any harm.

Corporate Finance | Credit Watch

S&P has placed the company’s rating on CreditWatch, owing to developments that substantially cause a rise in the “reputational, management, litigation, and other risks currently faced by News Corp. and its subsidiaries”.

Any future evidence that’s sufficient to bring a criminal charge against the company can damage the reputation of the company, more harmful in the longer run than any immediate fiscal losses or penalties, according to corporate finance experts.