THIS TIME: Hope Bumps Up Against Harsh Financial Reality As Vulture Hedge Funds Consume The Corpse of the McClatchy Company.

They had hope, these mayors and other civic leaders did in writing to the US Bankruptcy Court Judge presiding over the Chapter 11 proceeding involving the 30 communities served by McClatchy newsrooms, including the Modesto Bee.

Sacramento Mayor Darrell Steinberg was among the first to weigh in and did so in a fashion which would have made any reporter proud:

“As I write this, on the morning of June 17, the Miami Herald website features a story about the reaction to a beloved Black Lives Matter activist being found dead in Tallahassee. At the Sacramento Bee, a veteran business reporter describes how negligence by Pacific Gas & Electric Co. caused a fire in the hamlet of Paradise that killed 85 people and destroyed thousands of homes and businesses. The Charlotte Observer has a story of local leaders pushing for a mask requirement to help stop the spread of Covid-19. The Sun Herald in Biloxi, Miss. Writes about how the City Council in Gulfport voted unanimously to stop flying the state flag because it still features the Confederate emblem.”

He adds, in a later paragraph:

“The reporter assigned to City Hall in Sacramento has covered two five-hour council and commission meetings this week that ran late into the night—and its only Wednesday.”

Others, including Marian Kaanon, CEO and President of the Stanislaus Community Foundation,  joined Mayor Steinberg as he urged the court to: “choose a steward for this company that would build upon the journalistic traditions of two of the most storied names in the business—McClatchy and Knight-Ridder—rather than degrade them.”

There was a hope, up in Sacramento where the McClatchy enterprise was founded and where its current headquarters is, and here in Modesto, and in 30 cities big and small scattered through the country that somehow, someone, some way would step up and wrest the chain from the clutches of the hedge funds which made the highest bid in the bankruptcy sale.

But that hope was dashed when no White Knight bidder appeared. The Court now has before it the winning bid “sponsored” by one set of hedge funds and a backup bid by a hedge fund who signaled mass layoffs as one of its first moves if awarded the prize.

(More about the proposed sale, including the bid, the backup did, employee retention and other details, follows this piece)

A false glimmer of hope may have arisen from the fact that the bid was announced to be $312,000,000. At that number, maybe communities had a chance to pick off its paper, keeping the local focus.

The harsh, brutal reality is that the $312,000,000 number is not the real number. I apologize in advance for utilizing the concept behind the Pick-N-Pull Corporation to explain the reality.

Pick-N-Pull buys wrecked (salvaged is the polite term) vehicles and sells off the bits and pieces which were undamaged. The idea being that they should be able to get at least as much from the aggregate sales of the parts as they paid for the wreckage.

They cannot get less! That would be a loss, although paltry compared to what is at stake here.

When McClatchy hit the courthouse with its bankruptcy filing it had debt of just over $700,000,000 owed to hedge funds, primarily Chatham Asset Management (CAM) managed funds.

That money is not going to just go away. It’s not CAM’s money. It belongs to investors, all of whom chipped in at least $1,000,000 to participate in one or more of the funds registered in New Jersey or the Cayman Islands.

In my analogy, that is the cost of the salvaged wreck. This is the amount, in the aggregate, which the high bidder must get in order not to lose money. And CAM has a fiduciary duty not to favor one investor over another so it can’t play favorites.

So, the $312,000,000 bid buys the company but rest assured the balance owed to the hedge fund will be appended, if not now, then in the future.

Maybe it is clearer if you know that the $312,000,000 is not really all new money. It is composed to two elements, rounded, $261,000,000 in a credit bid and, rounded, $50,000,000 in cash. The credit bid is in the form of a release letter, basically excusing payment of the First Lien Notes in roughly that same amount. The cash is real but second in line for use of that money, after paying some costs of the bankruptcy proceeding, is payment of accrued interest on the hedge fund notes.

So, if a White Knight had put in a qualified initial bid and showed up at the auction to overbid, it would have faced counter bid after counter bid from the hedge fund which had to protect all its investors.

The Knight Foundation was understood to have some interest but it knew who and what it would have been bidding against and did not submit a final bid.

Before you abandon all hope, let me shine a dim light on a possibility for local purchase of one of the newsrooms: It may be that one of the 30 newsrooms is a “bleeder” which must be tied off. If there is a newsroom which simply cannot, once the effect of the pandemic is gone, produce more income than expense, perhaps the high bidder would consider a sale at a reasonable price.

You see the problem: The newsroom would only be offered for sale if it is a sure money loser, now and in the foreseeable future. A non-profit would be a possibility but if income and expense balanced, why would they sell?

If you can come up with a better analogy, please employ it.  This was the best I could do. And now for:

Sale Details:

  1. The “Purchase”: While press releases and statements have all called it a sale to Chatham, the actual filing list the “Purchaser” as SIJ Holdings LLC, a limited liability corporation which was registered in Delaware as formed on June 30, 2020. The address listed in the registration is the same address in New Jersey as Chatham.
  2. Transferred Employee Pay And Location: Every employee will get an offer of employment to work in the same position at a location no more than 50 miles from the current work location and under “substantially he same terms and conditions in the aggregate as provided to such individual” now. Those terms and condition would be good for at least a year.
  3. Employee Retention: “For a period of ninety (90) days after the Closing Date, the Purchaser shall not engage in any conduct which would result in an employment loss or layoff for a sufficient number of employees of the Purchaser which, if aggregated with any such conduct on the part of the Sellers prior to the Closing Date, would trigger the WARN Act.” The WARN Act is found in both federal and state laws and generally covers “mass layoffs” although mass can be as low as 30 depending on the size of the business.

 

 

3 comments

  1. You are as sharp as ever. I wish, though, that you’de have written that great novel about medium-sized American cities (e.g., Modesto) you once described to me. Jim M., Sacramento

    Like

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