Monday, April 12, 2010

ANALYSIS - Tribune-creditor pact only delays legal battle

By Tom Hals - Reuters

WILMINGTON, Del. (Reuters) - A settlement with Tribune Co creditors aimed at ending the media company's bankruptcy, and possibly Chairman Sam Zell's liability, may have avoided a legal "World War III" but it sets up a nasty battle to confirm the plan.
The deal estimates Tribune's value at $6.1 billion and shaves off about 7.4 percent of that for senior bondholders, with the rest going to senior lenders.

Tribune, which publishes the Los Angeles Times, Chicago Tribune, Baltimore Sun and other dailies and owns television and radio stations, has been in Chapter 11 protection since December 2008, after Zell took it private in a 2007 leveraged buyout.

The company said Thursday's settlement, which exonerates real estate mogul Zell and everyone else from responsibility for the disastrous buyout, will allow Tribune to "resolve these cases without the distraction, expense and delay of a protracted litigation."

The dynamics of the case suggests that is not likely, at least not yet.

"It sounds like bondholders are not part of the deal and if not, they are certainly likely to challenge the deal and challenge the plan at every opportunity they have," said Douglas Mintz of Cadwalader, Wickersham & Taft in Washington.
One legal strategy will take aim at billions of dollars of claims by senior lenders that bondholders want disallowed, claims that stem from Zell's takeover in 2007.

The leveraged buyout that Zell has admitted was the "deal from hell" has stood as something of a poster child for the excesses of the credit bubble. It piled more than $10 billion in debt on a company in a struggling industry and bondholders have blamed the "virtually no money-down LBO" for their investment losses.
"Tribune has all the earmarks of an overleveraged collapse," said Stephen Selbst of Herrick, Feinstein in New York. "It happened at the height of LBO transactions and failed fairly soon after."

Junior bondholders want to pursue claims against lenders such as JPMorgan Chase & Co and the Tribune board which they blame for the LBO.

Those claims were being pursued by the creditors committee, which was seeking to disallow as much as $10 billion in senior loan debt in what one group fighting the committee warned would be a "the bankruptcy equivalent of World War III."

The committee agreed to drop those LBO-related claims as part of Thursday's settlement, and all potentially liable parties were granted releases from legal claims.

One lawyer noted there is a risk from granting releases that are too broad.

"It's not unusual to have at the end of a case in a plan releases that exonerate all people," said Stuart Hirshfield of the firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo. "Courts have been very leery about approving them and trustees have been attacking those."


While support of the official committee would normally be a good sign of success for a settlement with a bankrupt company, Tribune's committee has an usual twist which bondholders have said taints it: the panel includes senior bank lenders.
Junior bondholders warned last year that "seven of the nine members of the official committee are economically motivated to reach a quick and rather easy plan settlement with a Zell-control management."

In contrast, junior bondholders are motivated to fight: Thursday's settlement proposes to wipe them out.

They certainly do not show signs of letting up.

Less than a day after the settlement was announced, the junior bondholders represented by Wilmington Trust Co and the law firm of Brown Rudnick, known for its aggressiveness, filed 208 pages in support of their request for an examiner to investigate the leveraged buyout.

The settlement does have the support of Centerbridge Capital Advisors, which owns 37 percent of a senior class of bonds.

Selbst said Centerbridge's support of the settlement will give the feeling of "the train leaving the station" and may encourage holdout senior bondholders to climb aboard.

Other major holders of the senior debt were not commenting on Friday.

The settlement will likely be incorporated into plan of reorganization, the battleground for the major fight.

If junior bondholders "feel they are getting short end of the stick they will push on every lever they have," said Mintz of the likely legal fight to come. "At a minimum, you try to get the debtor attention to try to extract a better recovery."
The case is In re Tribune Co, U.S. Bankruptcy Court, District of Delaware, No. 08-13141.

Reporting by Tom Hals; Editing by Richard Chang

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