Feb. 23 (Bloomberg) -- The Philadelphia Inquirer’s bankruptcy filing will make its owners and unsecured creditors the biggest financial losers as it seeks to cut debt.

Philadelphia Newspapers LLC will wind up with new owners while $98.5 million worth of notes aren’t likely to recover anything, according to court records and an investor. The company was one of two newspaper publishers in the Philadelphia region to file for Chapter 11 bankruptcy protection over the weekend. Both blamed an industrywide slump in advertising and rising competition from the Internet.

“The investors will lose everything,” Philadelphia Newspapers investor Bruce Toll, 65, who is also vice chairman of homebuilder Toll Brothers Inc., said in an interview. “We’re putting together a proposal for smaller debt.”

Philadelphia Newspapers, in its bankruptcy filing yesterday, and the Journal Register Co., a Yardley, Pennsylvania-based newspaper chain that filed for bankruptcy Feb. 21, said they will try to reduce what they owe lenders, using court protection to shield them while they restructure.

Philadelphia Newspapers’ noteholders hold debt that isn’t backed by any of the company’s assets. That means lenders owed $297 million must be paid in full before the noteholders can collect anything.

For the company owners to get back their equity, both the lenders and the noteholders must receive full payment, according to bankruptcy court rules.

In court papers, Philadelphia Newspapers said the value of the company and its assets is “almost certainly far less than the amount of the outstanding debt.”

Exit Plan

Toll said he hopes Philadelphia Newspapers will leave bankruptcy in about four months. He declined to say how much the company plans to ask debt holders to accept.

The newspapers’ revenue declined as much as 20 percent because of a drop in advertising since Toll and the investor group bought the Inquirer and Daily News in 2006, he said.

“The banks were getting itchy,” Toll said, referring to the company’s lenders. “There’s no way the debt can ever be paid off because the debt is $400 million. The paper makes money.”

He said investors initially paid about $550 million for Philadelphia Newspapers. The company is scheduled to be in court tomorrow to ask a judge for initial approval to borrow as much as $25 million to help it keep operating while in bankruptcy.

Newspaper Creditors

“If you are a creditor of a newspaper company right now, don’t expect to get paid back,” said Kirk Ruddy, who trades bankruptcy debt at APS Capital Corp. in Austin, Texas. The bank debt for Philadelphia Newspapers is trading in the high teens to low 20s in terms of cents on the dollar, he said.

Journal Register would cancel its stock and become a closely held company owned by its lenders under a proposed reorganization plan filed in U.S. Bankruptcy Court in New York. In Chapter 11 documents, the company listed debt of as much as $1 billion and assets of $100 million to $500 million.

Philadelphia Newspapers said it will focus on cutting the size of its bank debt and notes, while Journal Register, owner of the New Haven Register in Connecticut, said it will continue cost-cutting measures begun in 2007.

The bankruptcy filings follow petitions by Tribune Co. and the Minneapolis Star Tribune, which were unable to quell mounting financial pressures as credit markets tightened and more readers and advertisers moved online.

“The loss of revenue that has occurred as a result of the current recession is squeezing our operating profit which is now insufficient to service our debt load,” Philadelphia Newspapers Chief Executive Officer Brian Tierney said in a memo sent to employees late yesterday.

No Experience

Tierney led the group of investors in buying the Inquirer and the Philadelphia Daily News in May 2006. He and partners including Toll had no prior experience running newspapers.

Royal Bank of Scotland Group Plc was the agent for a $295 million term loan and $50 million in revolving credit that backed the purchase of the two newspapers, Standard & Poor’s said in June. Linda Harper, an Edinburgh-based representative for RBS, wasn’t immediately available to comment.

The 30 largest creditors without collateral backing their claims are owed $102.1 million, according to yesterday’s Chapter 11 filing. RBS is listed as the largest unsecured creditor, holding $22 million in subordinated notes, according to the filing.

Philadelphia Newspapers agreed to borrow $25 million from Callowhill Partners LLC to help it keep operating while in bankruptcy. That loan agreement came after Philadelphia Newspapers rejected an offer from its current lending group, which offered a $20 million loan at a higher interest rate, according to court records.

‘Dire Situation’

Five months after buying the publications, Tierney cited weak advertising revenue when eliminating 68 newsroom jobs, or 17 percent of the Inquirer’s editorial staff. In January 2008, Tierney told employees costs had to be reduced by 10 percent to avoid “a dire situation.”

The Philadelphia newspapers were among 12 former Knight Ridder Inc. newspapers that Sacramento, California-based McClatchy Co. sold after acquiring the chain in June 2006 for $4.1 billion.

‘Downward Pressure’

“With the increased competition from other forms of media and slumping advertising revenues, the downward pressure on newspaper earnings will likely remain intense in the near term,” Journal Register Chief Executive Officer James Hall said in court papers.

Journal Register employs about 3,500 people and operates primarily in the Philadelphia and Cleveland areas, as well as throughout Michigan. Shares of the company were trading for less then 1 cent today.

With the filing of the Chapter 11 cases of Philadelphia Newspapers and Journal Register, eight daily newspapers and 18 other non-daily publications in the Philadelphia region are in bankruptcy. Those publications are read by more than 2.3 million people, according to circulation figures for the two companies.

The persistent decline in advertising may push other newspapers to consider additional job cuts, shutdowns or restructurings.

New York Times Co., McClatchy and Media General Inc. halted payment of their quarterly dividend this year in response to dwindling ad sales. Gannett Co. cut about 4,000 jobs in 2008 and, like other publishers, is seeking to sell assets.

Advertising Plunge

Industrywide print advertising sales endured their worst plunge in at least 37 years in the third quarter, according to the Newspaper Association of America.

“There’s no real sign that there’s going to be any meaningful economic recovery this year,” Ken Doctor, an analyst at media consultant Outsell Inc. in Burlingame, California, said yesterday in an interview. “These companies that have been weakened by these poor advertising sales are going to have to make tough decisions about their future.”

The cases are In re Journal Register Co., 09-10769, U.S. Bankruptcy Court, Southern District of New York (Manhattan), and In re Philadelphia Newspapers LLC, 09-11204, U.S. Bankruptcy Court, Eastern District of Pennsylvania (Philadelphia).

To contact the reporters on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net; Greg Bensinger in New York at gbensinger1@bloomberg.net.

Last Updated: February 23, 2009 17:30 EST