This continues my speculative, continuing analysis of the bankruptcy of the parent company of The Modesto Bee. Time hasn’t assuaged my fear that we will eventually lose the print edition. Loss of the paper will also mean, as a practical matter, loss of other papers. Due to sorting errors of the Bee’s carrier, I have come to learn that some of my neighbors subscribe to The Bee and the Wall Street Journal; The Bee and the San Francisco Chronicle and The Bee and the New York Times, my combo. If The Bee isn’t delivered, the others won’t be either. Remember when you used to get other Saturday papers?
McClatchy and Chatham Asset Management,along with some smaller hedge fund creditors, hoped to slide a bankruptcy plan through the federal court, but some sophisticated creditors and a tiny virus has slowed, if not derailed their hopes.
It is clear that McClatchy has been hand-in-glove with its hedge fund creditors before and into bankruptcy. What is less clear is whether the fit is voluntary or at financial gunpoint.
Their coordinated moves began back in the spring of 2018 when, according to a filing with the SEC, a “term sheet” was disclosed that roiled the Credit Default Swap (CDS) market, a move that some called “market manipulation.”
What was proposed was the creation by McClatchy of a brand new entity, a limited liability corporation. The debt of the old corporations would be shifted to the new corporation. The creation of the new corporation could only be done with the cooperation of McClatchy and the shifting of debt only with the cooperation of the lenders.
The problem with, and the probable reason for, this scheme was that it would “orphan” as much as $500 million in CDS contracts. In another SEC filing, Chatham Asset Management said it was a party or counter-party to CDS contracts involving McClatchy.
The premise behind CDS contracts is that a going concern would attempt to make good on all its debt obligations and the market for those betting for or against defaults would be “efficient”…governed only by market forces.
By moving all of the old debt off McClatchy’s books and onto those of a new corporation, the possibility of a default became zero and those paying premiums could never collect. Hence the term “orphaned”.
The term sheet transaction was never completed because of the hue and cry about market manipulation, but because both McClatchy and Chatham had to agree on the move it might have been the first clear signal that default was on the horizon.
Chatham faced massive losses. In the event of a forced debt restructuring, such as through Chapter 11 bankruptcy, some of the debt was not then secured by McClatchy assets.
So, in the following summer, July of 2018, there was a reshuffling which moved about half of the roughly $600,000,000 debt from unsecured to secured.
It was this move which prompted the Pension Benefit Guarantee Corporation and the Official Committee of Unsecured Creditors to ask the bankruptcy judge to be allowed to tip toe through the records of both McClatchy and Chatham regarding the CDS activity and the unsecured-secured debt switch.
Evidence from the CDS shenanigans might impact the view of the debt conversion. The hand-in-glovidness of one action might show the conversion to be the kind of transaction which could be effectively set aside in the bankruptcy. This would mean that the secured debt would be about $300,000,000 not $600,000,000.
This difference could make room for the PBGC to get more than was originally offered in the plan. As a practical matter, the unsecured debtors will be lucky to get even pennies on the dollar, no matter how the bankruptcy winds down.
In opposing the motion to obtain the documents, McClatchy and Chatham said “nothing here to see”, claiming the CDS thingie was irrelevant and that the debt conversion was done in the normal course of refinancing, with others invited to participate. Right, anyone want to loan $600,000,000 to a company which hadn’t made a profit in years and was in a dying if not dead industry?
According to filings late last week, as much as $725,000 has already been spent investigating the two transactions.
Further evidence of the hand-in-glove approach from the debit and major creditor arose when the two tried to slide through a “stipulation” which would have amounted to a simple foreclosure. In response to other issues, McClatchy and the hedge funds had “stipulated” to a foreshortened timeframe for a sale with the hedge fund making a credit bid in exchange for 97% of the stock.
Since the “stipulation” did not include all the interested parties, the court did not buy into the plan and instead set up a longer timeline and opened the window to other potential bidders. Last week, a deadline for potential bidders to submit letters of initial interest passed. McClatchy’s bankruptcy managers refused to say how many, if any, letters were received.
Apparently two kinds of bids were contemplated. One is an outright purchase of all assets, free and clear of all liens. The other is a “plan bid”. In a plan bid a “sponsor” takes over the plan.
No matter what kind of bid is submitted, and no matter the amount, the judge has the final say. As the judge does with termination of the pension plan. If the judge decides there is some form of plan which allows the reorganized company to retain the plan, it can so find, and halt the pension termination process. The court is not restricted to looking only at a plan submitted by a gloved hand.
The new Coronavirus has caused much concern for the hedge funds. Seeing themselves as the ultimate owner of a reorganized McClatchy, they have pushed to limit the amount spent during the pendency of the bankruptcy proceeds, reserving objections to fee and cost requests from those representing other creditors.
The hedge funds recognize that McClatchy can and will burn through cash at an increased rate since revenues have plummeted.
But, for the gloved hand it seems like the biggest surprise is the tenacity of the pension guarantee folks. It is a tenacity which is subtle and nuanced in its approach. For example, in a recent filing it simply laid out for the court what the court had to find before the pension plan could be terminated.
That pleading had a single emphasized word: “any”, in italics. Some briefs have a plethora of emphasized words and the emphasis is diminished by their frequency. Not this brief.
What they told the court was that the court must examine whether termination could be avoided not in any plan proposed by the debtor, but in “any” plan. So, the court could look through the potential sale and decide to delay confirmation of the sale while the unsecured to secured transaction is litigated. If that conversion in priority could be set aside, a plan could be conceived which dealt only with a secured debt half of the current claim.
But that may be months away. McClatchy asked for an extension of the time in which it, and it alone as debtor-in-possession can propose a plan. It takes that period into October. By this time next year, hedge funds could control all but a handful of daily newspapers. Tribune Publishing is feeling the pinch as time passes and the hedge funds which own much of the stock is allowed to buy more.
The third largest shareholder of Tribune made an interesting proposition the other day: sell off the individual papers to local ownership. It is not known whether any bid for McClatchy could be for individual papers but the current framework is all or nothing. Sacramento’s mayor asked the court to consider as a factor in any bid, local ownership of the Sacramento Bee and, impliedly. the other two Bees.
Back to why the hand is in the glove, unwilling as I am to drop that metaphor. The hand…McClatchy…may have slipped into that glove willingly, at gunpoint or for reasons somewhere in between.
Chatham is managed by Anthony Melchiorre, once a hard charging trader and now the front man for funds worth many billions. He is known as a shrewd and hard headed investor, although how and why Chatham came to own about $30,000,000 in McClatchy stock (purchase vale) which will be worth about zero no matter how things turn out, escapes me. Certainly he reaped no dividends since McClatchy hasn’t paid out any in about a decade.
He potentially wields the proverbial carrot and stick. For at least two years, it has seemed probable that Chatham would own McClatchy, inside our outside, a restructuring. So McClatchy management probably wouldn’t want to piss him off. He could put pressure on management, before and after a bankruptcy filing, without saying a word.
Some of those folks at 21st and Q were doing quite well. Craig Foreman, CEO, President etc. made right at $1,000,000 in salary plus more than $400,000 for housing and travel in the year leading up to the bankruptcy filing. In that same period—12 months— he got bonuses of more than $3,400,000. Me, I wouldn’t have put in for that $26.99 expense reimbursement.
If McClatchy was going to need someone at the helm after bankruptcy, there was already somebody there, someone might have thought.
So what’s next. Well, maybe someone has a really creative idea but in any event it looks like the family shareholders are no longer going to be in control and those in control are probably going to be more interested in tying off the bleeders, cutting where they can and hope the future is financially kinder.
One thing is for sure, the plan to slip a restructuring plan through the bankruptcy court has not worked and McClatchy and the hedge funds are looking for a quick resolution. Probably that is why the idea of a sale was so inviting. The fact that a sale would end the inquiry into the suspect transactions probably wasn’t a consideration, was it?
A Little Long Form Journalism 