Tribune Creditors Open Bankruptcy Court Dispute Over Buyout

Tribune Co. creditors began a court fight today over a plan to reorganize the bankrupt newspaper publisher by shifting $1.57 billion in losses onto lenders led by JPMorgan Chase & Co.

U.S. Bankruptcy Judge Kevin J. Carey is faced with choosing between two reorganization proposals for Tribune during a two-week hearing in Wilmington, Delaware, a process one attorney involved compared to “water torture.” Tribune’s newspapers and television stations have plunged in value since a 2007 leveraged buyout and are now worth a little more than half the $13 billion the Chicago-based company owes, according to court documents.

Disputes over the LBO led by real-estate billionaire Sam Zell have pitted holders of about $2.5 billion in debt from before the buyout against lenders owed more than $10 billion for funding the deal. JPMorgan and other lenders now are seeking immunity from a proposed lawsuit by the rival creditors that a court-appointed examiner concluded the lenders may lose if it went to trial.

“This has been a long, ugly bankruptcy fight,” said Marshall Sonenshine, chairman of Sonenshine Partners LLC, the New York-based investment bank that arranged the bankruptcy auction of the Philadelphia Inquirer newspaper last year. “These companies are not thriving in this process.”

Tribune owns eight newspapers, including the Los Angeles Times and the Chicago Tribune, with a combined daily circulation of 1.9 million last year. The company’s 23 TV stations include sites in New York, Chicago and Los Angeles.

‘Like Water Torture’

The fighting between the two groups of creditors “is really like water torture,” said bankruptcy attorney James O. Johnston, who represents a hedge-fund that owns part of the buyout debt. “When will it stop?”

“Brother, you’re telling me,” Carey responded as the hearing began.

Carey said after lawyers for the two sides made their opening statements for and against the two plans that once he hears all the evidence, he may decide to reject both proposals.

“What then?” Carey asked, without giving either side a chance to answer.

The lenders and noteholders are backing competing plans to distribute $6.75 billion in new stock, cash and new loans to Tribune’s creditors. Both would keep Tribune intact once it exits bankruptcy. The biggest differences are over how to resolve allegations that the 2007 buyout caused Tribune’s insolvency by loading it with debt that couldn’t be repaid.

Specialized Debt Securities

Pre-buyout creditors, mainly noteholders and a group that owns specialized debt securities, want to sue the LBO lenders, company officials including Zell, and Tribune’s former owners, who collected $39 a share for their stock.

Zell, who has objected to both plans, resigned as Tribune’s chief executive officer in 2009 and remains chairman. He claims, through one of his companies, to be a creditor owed $235 million.

The noteholder group is led by hedge fund Aurelius Capital Management LP and Wilmington Trust Co., an agent for investors who hold exchangeable subordinated debentures issued by Tribune in 1999. Under their plan, a litigation trust would sue the lenders, accusing them of moving forward with the buyout while knowing the loans would make Tribune insolvent.

Their plan calls for putting as much as 65 percent of Tribune’s stock into a trust overseen by a board and a trustee appointed by Aurelius, according to court records. The stock would be distributed once the main buyout lawsuit ends, based on who wins.

57 Percent Chance

The lender lawsuit may bring more than $1.57 billion to non-LBO creditors, Aurelius said in court papers while predicting a 57 percent chance of victory. If Aurelius wins, the lenders wouldn’t recover anything until the pre-buyout creditors are repaid all $2.5 billion they claim they are owed.

On July 27, bankruptcy examiner Kenneth N. Klee released a report that bolstered the pre-buyout creditors’ position. The second part of the LBO, completed in December 2007, was vulnerable to a court challenge, Klee concluded. Tribune filed for bankruptcy protection one year after the buyout.

No matter which plan is approved by Carey, the lenders will ultimately get the majority of Tribune’s new stock, according to Aurelius.

Competing Plan

JPMorgan, based in New York, is sponsoring Tribune’s competing plan, along with two hedge funds that hold buyout loans -- Angelo Gordon & Co. and Oaktree Capital Management LP. Under that plan, Tribune and its official creditors’ committee agreed not to sue the lenders for arranging and funding the buyout loans. In return, the lenders agreed to give other creditors, including noteholders, more than $400 million in cash. Aurelius and other pre-buyout creditors would lose a total of more than $2 billion as a result.

Tribune’s plan would allow recoveries to be distributed more quickly. While the main buyout lenders would have immunity from lawsuits, a creditors’ trust would still pursue dozens of cases against Tribune officials, including Zell, and some former shareholders.

Delaying distribution of the stock would harm the company because it leaves ownership “in limbo,” said attorney James Sottile, who represents the official committee of unsecured creditors, which supports the JPMorgan plan.

The bankruptcy case is In re Tribune Co., 08-bk-13141, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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