Credit rating agency Standard & Poor’s says it is worried that MediaNews Group may soon violate the terms of its loans because of declining profits. One solution, S&P says, is to bring on a partner.

S&P has put MediaNews on its CreditWatch status, a move with negative implications that may reduce the privately held company’s ability to borrow more money.

MediaNews, headed by Dean Singleton (pictured), controls most of the Bay Area’s daily papers including the Mercury News, Contra Costa Times, Oakland Tribune and Palo Alto Daily News. In January, S&P lowered MediaNews Group’s credit rating from “B” to “BB-minus.”

S&P analyst Emile Courtney explained the negative listing this way:

The CreditWatch listing reflects our ongoing concerns regarding operating trends in the newspaper sector, which we believe will continue to drive meaningful EBITDA [earnings before interest, taxes, depreciation and amortization] declines for newspaper companies in 2008.

In the case of MediaNews, we are concerned that lower EBITDA may lead to a violation of the leverage covenant in its bank agreement over the near term.

Total leverage as measured per the calculation required in the company’s bank facility was 6.53x at December 2007; this compares with the company’s 6.75x total leverage covenant at December 2007, which steps down to 6.5x on June 30, 2008 and to 6.25x on Sept. 30, 2008. There is also limited cushion in the company’s 4.25x senior leverage and 1.25x fixed-charge coverage covenants.

As a result, MediaNews could tolerate only a limited amount of deterioration in its cash flow generation over the next few quarters.

We had previously stated that we believe the company has a number of good relationships with, and a long track record of, significant asset transactions with partners of solid credit quality.

We expect that one possible solution — should MediaNews encounter a covenant violation over the near term — would be to negotiate for a liquidity injection of some kind from a partner.

Over the near term, we plan to assess expectations for cash flow generation, and review with MediaNews the possibility for a transaction that may enhance the cushion under its bank covenants.

Here’s a link to the Denver Business Journal’s coverage of this announcement and a report in Denver’s Rocky Mountain News.