Just when newspaper earnings couldn't get worse, McClatchy (MNI) reported

McClatchy (NYSE: MNI) is the third largest newspaper chain in the U.S. It is also in debt up to its eyeballs from its purchase of Knight-Ridder. Its only chance of paying that debt is to get operating income up. Because of the bad advertising environment, that has not worked out.

Things have gotten so bad that McClatchy may default on its debt and creditors may end up owning and operating the company. Investment bankers running printing presses -- nice picture.

In the last quarter, reported Tuesday, revenue at MNI dropped $100 million to $451 million. Operating income was only $40 million against debt service of $34 million. The margin for error is gone. In September, ad revenue dropped 20%, so the fourth quarter could be McClatchy's last as an independent company.

Banks that have loaned money to newspaper chains are in a bind. They can seize assets and hope to sell them to cover debt, but with the industry environment so bad, the chance of them getting their money back is slim.

The other option may be the more intelligent one. Alter loan deals to stretch out payments, take 100% of operating income to cover debt and hope that newspaper recover, even a little. That option beats selling assets in a market that does not want them.

Douglas A. McIntyre is an editor at 247wallst.com.