Tribune Company. building its case to stay intact

Corporate structure may need to be altered to reach workable plan.

By Michael Oneal | Tribune reporter
Chicago Tribune

A month into its Chapter 11 bankruptcy case, Chicago-based Tribune Co. is beginning to form a strategy for holding the company's major assets together, not tearing them apart, sources close to the situation said.

But shaping up to be a central challenge is how to restructure the media conglomerate's $13 billion in debt while preserving its complex, tax-advantaged employee-ownership structure.

Though Tribune Co. executives remain in the early days of building a plan of reorganization, sources said Chairman Sam Zell's team is operating on the assumption that Tribune Co. assets like the Chicago Tribune, Los Angeles Times and WGN TV-9 are probably worth more held together than they would be chopped up and sold at distressed prices.

An exception is the Chicago Cubs baseball team, which is in the late stages of being sold, with a winning bidder expected to be named as soon as this week.

Zell is also intent on preserving Tribune Co.'s S-Corp ESOP corporate structure, reasoning that its tax advantages will continue to have significant value if the company can emerge from bankruptcy protection as a going concern.

The trouble with this plan, tax experts said, is that reworking Tribune Co.'s financing could be hampered by restrictive tax rules that govern S-Corp ESOPs, corporate structures built around an employee stock ownership plan.

Several creditor representatives said last week that they might support keeping the current structure intact but said making a deal succeed in that framework will be difficult.

"That's one of the big issues," said Chadbourne & Parke attorney Howard Seife, who represents Tribune Co.'s committee of unsecured creditors.

A Tribune Co. spokesman declined to comment.

Tribune Co. and its advisers are focused on building a case for how much the company is worth and how much cash flow it can generate in the future. That analysis will lead to a calculation of how much debt the company can support going forward, very likely a number significantly lower than the company carries today.

Once that is done, the company will have to create a plan to rework the capital structure in a way that lowers the debt to sustainable levels but gives creditors enough in return that they agree to move forward without a fight.

That's where the S-Corp ESOP complicates things.

Zell came up with the S-Corp structure to help grease his $8.2 billion bid to take Tribune Co. private in December 2007. Its advantage: It allows the company to pass through its annual tax liability to an ESOP, which doesn't have to pay taxes because it is a qualified retirement plan.

By eliminating those taxes, the structure promised to boost Tribune Co.'s cash flow enough to support the fat debt load needed to get the going-private deal done.

It subsequently helped to structure Tribune Co.'s tax-advantaged deal to unload its Newsday metropolitan daily in New York for $650 million and may figure prominently in sheltering Tribune Co. from a big tax bill from the Cubs transaction.

Tax advantages, of course, didn't mean much last year when the newspaper market faltered and the economy fell apart, forcing Tribune Co. to file for Chapter 11 on Dec. 8. But sources close to both Tribune Co. and its creditors said that the S-Corp tax benefits could become an essential part of the company's ongoing value if the economy improves and Tribune Co. manages to emerge from bankruptcy as a profitable company.

To get there, however, creditors like JPMorgan Chase, Citigroup and Bank of America will have to agree to forgive some of Tribune Co.'s debt, possibly billions of dollars worth. And given the S-Corp complications, a typical solution used to make that easier—swapping debt for equity—may not be feasible in this case, experts said.

Among other things, tax rules stipulate that an S-Corp can have only 100 shareholders and that they must be individuals, not corporations. A retirement plan like an ESOP, which can have thousands of members, is permissible. But a giant lender like JPMorgan wouldn't be.

In Tribune Co.'s S-Corp ESOP, the employee plan owns 100 percent of the company's equity. Zell and a small group of other individuals hold warrants to buy about 40 percent. At the moment, the ESOP shares are essentially worthless. But if the company recovers and grows over time, the employee shares could grow too.

Robert Willens, a highly regarded tax adviser in New York, said the S-Corp rules would impede swapping debt for equity under the current Tribune Co. structure. The company could revert to a C-Corp, the standard corporate structure, but then it would lose its income tax break and leave itself exposed to tax bills from the Newsday transaction and, possibly, the Cubs deal.

An alternative, Willens said, would be to compensate lenders with some sort of debt security that had no interest requirements and equity-like characteristics that allowed the lenders to participate in the company's upside.

"It would have to be equity-like, but not so equity-like that the government determines that you've really just created a second class of stock," Willens said.

Another bankruptcy tax expert who asked not to be named, however, said that some lenders might not be willing to risk the legal ambiguity that can accompany such an arrangement. No matter what lawyers advise now, he said, the Internal Revenue Service can challenge it later, and often does.

"It can become a constant battle," he said. "They have to ask themselves, is this S-Corp structure worth living with, or do we want to trash it and go back to a C-Corp?"

One advantage Tribune Co. has as it contemplates a solution is time. In court filings, the company projects maintaining more than $500 million in cash over the next year, largely because its newspapers and television stations generate operating income. On Thursday, it got the court to sign off on extending an existing $300 million in short-term receivables financing from Barclays Bank PLC, as well as a $50 million letter of credit.

That means it can operate its businesses without seeking outside financing at a time when nobody is lending, especially to companies in bankruptcy.

It also is true that few of Tribune Co.'s creditors have a direct call on the company's assets, a vestige of the loose lending practices that directly preceded the economic crisis. The big lenders like JPMorgan that financed the buyout deal have seniority over other creditors.

But unlike in many other bankruptcies, these senior lenders have no right to demand interest payments from Tribune and have little control over how the company manipulates its hard assets.

Consequently, Tribune management can continue to restructure the company and try to come up with a plan to reconfigure the capital structure that lenders can accept.

"It's unique to have a company that can fund itself," said an adviser to one large creditor. "The whole panoply of options is still outstanding."

mdoneal@tribune.com