Newspaper firm Johnston Press has been forced to raise £212m through a deeply discounted rights issue to prevent it breaching debt covenants following a downturn in advertising.

Malaysian investment firm Usaha Tegas will also take a 20 per cent stake in the Edinburgh-based company, through a share subscription and the acquisition of a further 10 per cent of Johnston Press from the group's family trusts.

The news sent shares in the group, which owns The Scotsman down 10.9 per cent to 121p by 07.49am.

On a like-for-like basis, advertising revenues were down 7.1 per cent for the 17 weeks to April 26 on last year, due to declines in advertising on property, employment and motoring.

This compared to a decline of 4.2 per cent for the first 8 weeks of the year.

The group said it planned to raise the money through the issue of approximately £320m new ordinary shares at a price of 53 pence per share, representing a 61 per cent discount to the closing price on Tuesday.

"Given the recent reduction in consumer confidence, and deteriorating economic forecasts, the board believes that the prudent action is to raise equity capital in order to reduce debt," the group said.

"Given the more challenging environment, the group is working hard on managing its cost base and, providing there is no further deterioration in the advertising environment, expects to deliver a satisfactory result for 2008 in very difficult circumstances."

Chief Financial Officer Stuart Paterson told reporters on a conference call that the group had considered several options including selling assets and were forced to act due to the volatility in the advertising markets.

"We reached the view that the level of debt in the business was probably inappropriate but it is important to state that we weren't expecting to breach our covenants at the end of June at all," he said.

"But with the outlook as it is ... we decided to enter a fundraising period."

Analysts were concerned by the news.

"A deep discounted rights issue at a 61 per cent below the current market valuation says a lot about the group's financial position and the market's tolerance for balance sheet building as opposed to business expansion fund raising exercises," Landsbanki analyst Andrew Walsh said in a note.

"The stress in the group's current capital structure and deterioration of advertising revenues are beyond our and the market's expectations.

"We expect to confirm a profits downgrade after the analysts' meeting today (5 per cent plus). We suspend our Buy rating for now with the blended price suggesting a post rights price of 90-95 pence."

Ralph Marshall of Usaha Tegas said, with its links globally in telecommunications and media, the company planned to be a supportive shareholder and make contributions on a continuing basis where appropriate.

He said Usaha Tegas believed in the potential of Johnston Press and said the investment would help the group develop new media opportunities.

Johnston Press, which is one of the largest local and regional newspaper publishers in the UK, had net debt of £700m. The rights issue has been fully underwritten by Deutsche Bank as sole bookrunner.