Thursday, August 27, 2009

Tribune Bondholders Fault Zell Takeover

The Wall Street Journal

Disgruntled Tribune Co. bondholders have asked a U.S. bankruptcy judge to let them investigate Sam Zell's 2007 buyout of the newspaper-and-television chain in an effort to derail a plan that would hand the company over to its banks.

The filing, made late Wednesday, calls the $8.2 billion transaction a "fraudulent conveyance" that left Tribune insolvent from the onset of the 2007 deal. It accuses senior lenders led by J.P. Morgan Chase & Co. of completing a leveraged buyout they should have known would push the company into bankruptcy.

Angry debt holders who purchased Tribune bonds before real estate mogul Sam Zell led the leveraged buyout are asking a bankruptcy judge to let them investigate the deal. Their request, made in a court filing Wednesday, comes as Tribune, owner of the Chicago Tribune, Los Angeles Times and other newspaper and TV properties, slogs through its ninth month in bankruptcy court.

More specifically, the bondholders–who call themselves “the pre-LBO creditors”–say lawyers and financial advisers working for the creditors’ committee can’t possibly investigate the Zell deal, because they also represent the banks that financed the buyout. They also take shots at firms representing Tribune, saying they have various conflicts preventing a necessary look at the Zell deal.

In court papers, representatives for the bondholders say neither Tribune nor the creditors’ committee “has conducted a complete factual investigation into the circumstances surrounding the LBO.…Despite the normal expectation that the committee would immediately probe deeply into the facts and circumstances surrounding the leveraged buyout, after nine months, nothing of substance addressing recoveries has transpired and no claims have been brought.”

The bondholders call out creditors’ committee counsel Chadbourne & Parke, noting that it represents J.P. Morgan and other banks and thus can’t pursue litigation against those banks or other deal advisers. They also single out Landis, Rath & Cobb, noting its representation of J.P. Morgan and other conflicts means it can’t give adequate representation to all creditors. AlixPartners, the committee’s financial adviser, gets the conflict treatment, too.

The bondholders note it has the banks as clients in certain cases and points to an AlixPartners affidavit that says the firm might not be able to pursue litigation against those clients.

The bondholders' request is fairly typical after leveraged buyouts land companies in Chapter 11. If a judge approves their request, the bondholders could end up filing claims against Zell or the banks that provided financing for the deal and now stand to take over the company.

These creditors could also ask the bankruptcy court to require that the banks that participated in the buyout get paid after other debt holders.
Either of those options could pressure Tribune to give the bondholders a better deal in a reorganization plan.

"Sometimes the threat is better than an investigation," said Ira Herman, a bankruptcy attorney with Thompson & Knight.

The filing said it was on behalf of creditors who hold 18 percent of Tribune's bonds, but it did not reveal their names.

"What they want is to maximize their payout," said Juliet Moringiello, a law professor at Widener University. "They want to make sure they get paid what they deserve."

The request was made late Wednesday by the Law Debenture Trust Company, a firm claiming to represent 18 percent of Tribune’s bondholders.

The firm is seeking documents related to the leveraged buyout to help prove that the 2007 deal was done despite knowing it could render the company insolvent. The court’s approval would give Law Debenture access to Tribune documents that would otherwise be unavailable.

Should the judge reject the request for an investigation, Law Debenture asked that an independent examiner be appointed as an alternative.

Law Debenture’s legal argument touches upon a claim known as “fraudulent conveyance,” an assertion that Tribune and its lenders should have known that sale would leave Tribune in precarious financial health.

The private equity firm Centerbridge Partners is a lead member of the group that is seeking an investigation, according to a person briefed on the filing. Centerbridge did not respond to a request for comment Thursday.

Zell, who is expected to leave the company in the bankruptcy reorganization, engineered the complicated deal to take Tribune private two years ago and create an employee stock-ownership plan. It quickly turned out that the architects of the buyout had made overly optimistic projections for the advertising revenue Tribune's newspapers would generate.

The recession has pummeled the newspaper business, with major publishers reporting ad revenue declines of as much as 30 percent.
By the time it filed for bankruptcy protection in December 2008, Tribune had accumulated $13 billion in borrowings to $7.6 billion in assets.

In their filing Wednesday, the bondholders claimed the buyout was fraudulent, pushing the company into insolvency without giving it "equivalent value" in return for taking on the debt, which mainly went to cash out Tribune stockholders.

"The idea is the company took on a tremendous amount of debt and at the end of the day didn't have any assets to show for it," said John Penn of Haynes and Boone LLP. "Usually when you borrow money, you've got the money and you get to buy stuff with it."

The bondholders said they want to see e-mails and other communications about the deal and to interview those who participated in negotiations.
"For these claims to be potentially whitewashed and swept under the rug would make this case a travesty," the bondholders said in the filing. "Chapter 11 clearly should not be a vehicle to deliver reorganized equity to the lenders that caused the debtors' demise."

An investigation could help them make the case that Zell or the banks are culpable, but making claims stick could be difficult.

"We knew it would be tough from the very beginning and thought (Zell's) projections were optimistic," said Dave Novosel, a media analyst with Gimme Credit. "But I don't know that that's illegal."

Tribune Co. did not directly address the claims in a statement Thursday.
"Our goal is to develop and implement a plan that maximizes the value of the company for all parties ... and treats all creditors fairly, and to do so as quickly as reasonably possible," the company said.

The four banks that financed the 2007 Tribune buyout were JP Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Merrill Lynch & Co., which is now part of Bank of America.

JP Morgan Chase spokeswoman Christine Holevas said the bank doesn't comment on pending litigation. Calls to Citigroup and Bank of America, which now owns Merrill Lynch, were not immediately returned Thursday.

The bondholder action was interpreted as a prelude to a possible lawsuit.

“Anybody who was reasonable should have foreseen this,” said Bill Brandt, a restructuring specialist based in Chicago. “Very few people are going to do well in this bankruptcy, except those at the top of the food chain, because the values simply aren’t being realized. It is precisely that circumstance that causes this litigation to appear on the horizon.”

The plan is expected to be presented by early fall, according to a person briefed on the matter. Tribune filed for bankruptcy last December with the assent of its bank lenders.

“Chapter 11 clearly should not be a vehicle to deliver reorganized equity to the lenders that caused the debtors’ demise,” lawyers for Law Debenture wrote in the filing.

Law Debenture said that it made its filing because it believed that Tribune’s official creditors committee — a group of the company’s largest claimholders — was conflicted: two of the group’s largest members are JPMorgan and Merrill Lynch.

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