Friday, June 25, 2010

Bankruptcy for Tribune Gets Hung Up by Squabbles

The Wall Street Journal

Bankruptcy has been a surprising breeze for a number of companies that sought protection from creditors over the past two years.

But 18 months in, one case remains stymied in squabbling over just how the company landed in bankruptcy in the first place. That is Tribune Co., the ailing media company that was taken private in 2007 with an $8.2 billion deal by real-estate investor Sam Zell. Today, the transaction continues to haunt the company, its management and creditors.

A group of creditors holding Tribune's bank debt is threatening to upend the newspaper-and-television station owner's plans to exit from bankruptcy later this summer. Separate lender groups are deposing Mr. Zell and James B. Lee, a top banker at J.P. Morgan Chase & Co., which backed the buyout.

Also, a court-appointed examiner probing Mr. Zell's buyout for possible fraud could give ammunition to creditors of all stripes to battle Tribune's restructuring plans.

Tribune seemed to be in the final lap of its sojourn through bankruptcy court when it reached a settlement in April with investors who hold the company's bonds. The bondholders had threatened legal action, claiming the company's banks doomed it to collapse by financing the buyout with unsustainable debt. Each side feared the outcome of a trial would be too uncertain and costly and agreed to a d├ętente they deemed "fair and reasonable."

But instead of whisking Tribune through court, the settlement has drawn fire from a group of investors holding some of the firm's bank loans that are the first in line to be repaid. The dissident lenders, led by Oaktree Capital Management, are grousing that holders of bank debt are unfairly paying more than $400 million to bondholders, while Mr. Zell and the buyout's original backers contribute nothing. They complain that the settlement at the same time insulates Mr. Zell and his backers from litigation related to the buyout.

The dissident lenders have emerged as the most significant hurdle to Tribune's efforts to exit from bankruptcy and start anew. Further litigation by Oaktree and its allies could prolong Tribune's stay in bankruptcy court, depending on their ability to forge a coalition that could vote against the company's restructuring plan.

The publisher of newspapers including the Chicago Tribune and the Los Angeles Times has languished in bankruptcy, compared with other corporate casualties of the financial crisis that have sped through court. Small-business lender CIT Group Inc. neared collapse last summer, then later filed a prepackaged bankruptcy from which it exited in 40 days. Detroit auto makers General Motors and Chrysler used bankruptcy sales to restructure in less than two months.
During Tribune's much longer slog, the company's financial performance has continued to slip.

Operating cash flow fell 37% to $494 million in 2009, according to court filings.

Tribune's trip through bankruptcy has left employees, advertisers and vendors in limbo. Mr. Zell himself stepped down as chief executive and has refocused on real-estate deals, leaving his ill-fated media venture behind.

A Tribune representative declined to comment on the bankruptcy proceedings.
To a certain extent, the Oaktree group's fight is emblematic of bluster from creditors who typically angle for incremental gains in bankruptcy court. Whether the Oaktree lenders will succeed in blocking Tribune's restructuring is far from assured.

Investors holding some of the largest amounts of Tribune's bank debt—including J.P. Morgan, Bank of America Corp.'s Merrill Lynch, Angelo, Gordon & Co. and Avenue Capital Group—support the company's settlement and restructuring plan, leaving fewer influential creditors for Oaktree to rally to its cause.
The Oaktree group's momentum has slowed recently: The dissident lenders hold about $2.3 billion of Tribune's bank debt, according to the most recent court filings, down from $3.6 billion in April.

Still, the Oaktree group, if it holds together, remains in striking distance of blocking Tribune's bankruptcy plan, holding about a quarter of Tribune's bank debt. To exit from court, Tribune needs creditors holding roughly two-thirds of its $8.7 billion in bank debt to approve the company's current deal, meaning a coalition holding one-third of the debt could scuttle the company's plans. Tribune's plan was put to creditors to a vote earlier this month.

At issue for the Oaktree group are the terms of Tribune's settlement over litigation related to Mr. Zell's leveraged buyout. The buyout ballooned Tribune's debt to about $13 billion, and bondholders led by Centerbridge Partners LP alleged the deal amounted to a "fraudulent conveyance" that rendered the company insolvent. Bondholders agreed to drop the litigation in exchange for 7.4% of Tribune's value. Bank lenders will forgive their debt for a 91% ownership stake in the company.

All are awaiting a report from bankruptcy-court examiner Kenneth Klee, which will probe circumstances surrounding Tribune's ill-fated buyout. If Mr. Klee finds that fraudulent-conveyance claims have merit, it could embolden lower-ranking creditors and push the Oaktree group to accept the current settlement, which insulates bank lenders and others from legal liability.
A finding that the claims are meritless, on the other hand, could encourage the Oaktree group to continue fighting, on the belief they shouldn't bear costs of a settlement with bondholders whose litigation would be unsuccessful in the first place. . Mr. Klee has called his task "massive" and asked Wednesday for a two-week extension, adding another potential delay to Tribune's restructuring.
He declined to comment.

Write to Mike Spector at and Shira Ovide at

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