Or, he said, emphasizing the word OR, should McClatchy management have grown a pair; put on the Risky Business sunglasses, said WTF and told its creditors to pound sand.
It couldn’t have resulted in anything worse than losing control of the 160 plus year business and having the heirs of the founder and hand it over to a batch of funds, the major one of which is called a “high yield” fund, managed by a good friend of The Donald.
Anthony Melchiorre, Chatham Asset fund manager, and complicit McClatchy managers said they are interested in continuing support for local journalism.We call bullshit to Chatham’s resolve to do anything more than continue to bleed the nation’s second largest newspaper chain to get all the “yield” they can. Vampire analogies abound.
For those who control McClatchy now, these expressions are salve to the wounds they must feel as they watch family control disappear. Certainly, they hope, realistically or not, that its award winning journalism will continue.
But, he said, emphasizing the word BUT, what if McClatchy took a different approach to reorganization through the Bankruptcy Act and tried to wipe out some, maybe even most of the Chatham debt.
(Note: There are other secured debtors, but Chatham holds more than 90% of the debt so for purposes of this rant it is easier to name only one bad guy. They will all be treated the same by the bankruptcy court.)
Before we offer an alternative approach, let’s background the existing situation, with numbers rounded to make things easier:
McClatchy began this week with more than $730,000,000 in secured debt, basically in three different debt instruments with different maturity dates all owed to Chatham. When McClatchy didn’t make the interest payments due, all three debts became instantly due and payable, including both principal and accrued interest.
In addition, McClatchy had a qualified pension plan which covered about 24,000 employees (2,400 current) and was in arrears by about $800,000,000. This plan was insured by the Pension Benefit Guarantee Corporation (PBGC). McClatchy failed to make a payment which would have been part of $120,000,000 contribution due this year.
So, the parties competing for their slice of the pie were Chatham and PBGC. It appears McClatchy agreed to satisfy Chatham by giving up 97% of the equity in the company and reducing the debt load to $217,000,000, with interest at 10%, higher than the rate of any of its current debt.
The PBGC has balked at the proposal, and it is just that, a proposal, which would see the PBGC getting about $10,000,000 over about a seven-year period.
In its filing, which stops any enforcement action by any creditor, McClatchy has asked the court to appoint a mediator to conduct settlement discussions.
While I was a lawyer, after being a reporter, I was not a bankruptcy lawyer and have no real expertise in this field of law. But who needs to be an expert, these days, to suggest an alternative course of action? Not me!
So, what if, he said emphasizing the word IF, McClatchy utilized a section of the bankruptcy which could allow it to discharge a big hunk of the Chatham debt?
Bankruptcy courts have recognized that in virtually every corporate bankruptcy there is going to be a failing business and a creditor who wants all its money back. If every secured creditor was to be made whole there would never be the second chance which is the premise of the Bankruptcy Code.
Therefore, the courts have developed a system for dealing with a “over-secured” creditors like Chatham. The court allows as a secured claim an amount equal to the collateral then existing. The balance then becomes an unsecured claim and can be discharged.
And, again emphasizing the word AND, the amount of the reduced secured claim is converted into a loan with a fixed maturity date, interest at what is usually a lower rate than imposed on the original debt, and fixed periodic payments.
This is called a “cram down” because it is literally crammed down the gullet of the creditor who must wait to get a reduced amount, with reduced interest, at a later date.
Every aspect of this type of reorganization can be litigated, from the value of the collateral to the interest rate of the loan to the due date of final payment. Creditors whose investment is crammed down sometimes get pissed off. More on what that might mean later.
Let’s suppose in our setting that McClatchy claimed it was worth far less than the Chatham debt. It could argue it hasn’t had a profitable quarter since forever, dividend payments likewise, its real estate holdings have been sold and its biggest assets, on paper, are intangibles like goodwill.
Right now, McClatchy faces interest payments on the Chatham debts of about $50,000,000 a year with maturity dates not that far in the future.
It would go against the grain, and fly in the face of past public pronouncements for McClatchy to say it wasn’t worth nearly as much as it said it was in the past. But swallowing past puffery may be required.
Is McClatchy worth a half of the $730,000,000 owed, or maybe a third? Would reducing the debt load give it the breathing space it needs to make the transition to digital?
Reducing the debt load would also free up some money to make peace with the PBGC which right now is looking at the proposal and saying Chatham is getting far more than is fair, since PBGC would be taking over the distressed pension plan without any future contributions from McClatchy.
It would be a tough call to make for management to try this suggested approach. Current management can likely feel assured of continued employment, or a valuable parachute if Chatham doesn’t feel too stung.
After all, Chatham is still going to have to answer to its “high yield” seeking investors. Why do they now own a money losing newspaper chain? What happened to the millions of dollars that was used to buy 23% of the common stock which is now worthless, as is all McClatchy stock under the current proposal?
The risk, primarily to current management who might want to be retained, is that if the value of the collateral is determined to be too high, thus not shedding enough debt to keep the company under family control, the creditors put through the litigation wringer are not going to be happy.
Maybe everyone is happy. Maybe the family is tired of the hassle, of the quarterly bad news, and wants to move on. Well, that might be accomplished with the current bankruptcy proposal. On the other hand there are those who think the McClatchy standards may not be retained by the hedge funders.
Remember, dear reader, that I am not an insider; have no special knowledge about the negotiations, including whether my idea was ever considered.
But it would be nice to know that it was considered and rejected for good reasons, wouldn’t it?
Talk among yourselves.