Moody’s has lowered the bond rating of MediaNews Group three levels from B3 to Caa3 on a 21-notch scale, a rating that suggests a “substantial risk” of default, E&P reports today.

MNG’s leverage ratio is now 8 times debt to earnings before interest, taxes, depreciation and amortization. Tribune Co. went into Chapter 11 bankruptcy on Monday when it began to approach a ratio hit 9 times EBITDA. By comparison, Gannett’s ratio is 2 times EBITDA.

MediaNews’ revenue fell 16 percent in the quarter ended Sept. 30, according to Moody’s. The rating agency said continued ad sales declines increase the likelihood that MediaNews won’t be able to meet terms of its debt agreements.

MediaNews owns 11 daily newspapers in the Bay Area including the Mercury News, Contra Costa Times, Oakland Tribune, San Mateo County Times and Marin Independent Journal.

Moody’s said the outlook for MediaNews remains negative:

“The downgrade of the PDR to Caa3 reflects Moody’s view that MediaNews faces a heightened risk of near-term default under the financial tests of its recently-amended senior secured credit agreement as well as the refinancing risk posed by the December 2009 maturity of its revolving credit facility.

“The Caa3 CFR incorporates MediaNews’ heavy debt burden, high leverage (calculated by Moody’s to exceed 8 times debt to EBITDA at the end of September 2008), and the weak level of debtholder protection indicated by current newspaper valuation multiples. In addition, the rating incorporates the secular pressure facing the newspaper publishing sector and the impact of current recessionary market conditions which have gripped virtually all of MediaNews’ geographic markets. The rating is
supported by the diversification of MediaNews’ geographic and customer base, the reputation of its mastheads, and the continuing support “provided by its largest partner, The Hearst Corporation.

“The continuing negative outlook underscores Moody’s concern that a potential restructuring or recapitalization could result in further ratings downgrade.”