THIS TIME: Everybody has a plan until you get hit in the nose.

Two blows have struck McClatchy’s plan for a quick restructuring of the nation’s second largest newspaper chain, which includes the Modesto Bee. The unexpected cash burn caused by lawyers’ fees and other administrative expenses was just a jab. The telling blow was the even more unexpected Covid 19 pandemic which has gutted advertising revenues.

So now, the biggest creditors, Chatham Asset Management and Brigade Capital Management, are pushing for an auction to be completed by July. They propose to be a “stalking horse” by making the first offer. The exact terms of that offer have been presented to McClatchy and the official Creditors Committee but have not been made public. The basic offer is valued at $300,000,000 which is not a cash bid but a credit bid. In other words, we will forgive $300,000,000 in debt for the keys.

Questions to McClatchy yesterday, the day of the filing, were referred to McClatchy’s advisors. The questions were simple: “Am I correct that the restructured company anticipated by the term sheet would have a secured debt to Chatham and/or other hedge funds? What would be the amount of that debt?” (email).

The response: “The term sheet has not been filed publicly, but there is quite a bit more information about its proposed structure (and I would flag that it is still a non-binding proposal, not an APA)in the publicly available court documents (here), which should give you the information you are looking for. Of course, if you have any other questions, don’t hesitate to let us know.” (emphasis added) (email).

Guess I was looking for a number. Guess I didn’t get it. Maybe it is in the filings. Some things I cannot easily find. It should be easy to find. Imagine if you were looking to buy a home and the seller said I want XXXXX cash and you can assume the mortgage. How much is the mortgage? “Something” would not be an acceptable number. Nor would a reference to the 300 plus filings.

My guess is the object which fouls the punchbowl for any other potential purchaser is a secured debt of about $300,000,000… MORE.

Anybody think McClatchy is worth a $300,000,000 down payment with additional payments of more than $30,000,000 a year for the next 10 years (my guess as to the terms of the secured debt).

The original disclosure filed by McClatchy showed pre-petition debts totally a little over $700,000,000. All but about $15,000,000 was in three distinct tranches. The First Lien note was about $263,000,000. The Second Lien note was for about $157,000,000 and the Third Lien note was for about $268,000,000. (We are using “abouts” because all the debts rack up interest).

What is being proposed as the stalking horse offer is about $300,000,000, $30,000,000 of which is “new money” called “exit financing”, the balance being one of the tranches of old debt…plus what?

I, for one am flummoxed. What is McClatchy worth? According to the filing, McClatchy’s operating income for 44 recent days was about $250,000 a day. In 2019, According to the 2019 10k, the daily income was more like $1.5m per day. These may be apples v. oranges number because the filing really doesn’t define “operating income” while the 10k states “total revenue.”

What is clear is that even without debt payment, McClatchy is in trouble. With debt payment, it is way underwater.

Chatham may, at first blush, look like a good guy with its stalking horse offer, not like the wolf I called them in an article last September, even before someone got a bad bat at the wet market in Wuhan.

Why did Chatham and its hedge fund allies decide to make this offer. Well, although they and McClatchy management went hand in glove to the bankruptcy court, there has been some slippage. Objections have been made to the priority sought by the second and third tranches.

The objectors claim the second and third tranches jumped from unsecured to secured creditors in June of 2018 when McClatchy was already insolvent, according to some metrics. This might be a fraudulent transfer which the court could rule makes the second and third tranches unsecured and dischargeable.

The stalking horse offer has some of the hedge fund debt paid off through the credit bid with the rest secured by the assets of Restructured McClatchy. Problem solved

Two things may have also played a role in prompting the bid:

First, the creditors committee got authority to examine a ploy by McClatchy and Chatham in the credit default swap market. They wanted to create a brand, new entity which would have taken over all of McClatchy’s debt. That way, if (when) the original companies failed to make payments when due, there would be no default and the credit swap contracts would be “orphaned”, made worthless. Cries of “market manipulation” iced that scheme.

Second, a couple of months later the unsecured to secured transaction was made and, perhaps, the credit default swap move would be evidence that the unsecured-secured change wasn’t made with the cleanest of hands.

Finally, McClatchy recently proposed that during the bankruptcy proceeding, which was going on, and would likely go on, much longer than originally anticipated, the lawyers be paid less (shudder) and the first lien holder be paid less during the pendency of the bankruptcy as well (SHUDDER).

The stalking horse offer is included in Chatham’s objections to McClatchy’s request. If they are the only bidders, Chatham et al can turn to the court and say “see”.

Still haven’t heard the words “cram down” have you? Remember, a cram down can be utilized when a secured creditor is “over-secured”. That is when the amount of the debt is more than the collateral. In that case, the court creates a secured debt no greater than the amount of the collateral, with interest at as reasonable rate, payable over a reasonable period of time, The balance of the original debt is an unsecured debt and can be discharged.

Chatham, understandably, wants all its investment back. It is, after all, not its money. Some of those folks who entrusted their money to Chatham’s manager, Mr. Melchoire, can shout pretty loudly.

The biggest problem for the observer is that the term sheet is not public and although referred to in the recent pleadings is not an exhibit. Some reference is made to future First Lien notes but there is a number.

Back to the house sale analogy, the full listing price is not stated., is not disclosed. Would that scare off a bidder?





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