Tribune control of bankruptcy plan challenged

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Posted by on November 25, 2009 at 15:23:34:

Tribune Co. control of bankruptcy plan challenged by investment funds

By Michael Oneal
Tribune reporter
November 25, 2009

A large group of prominent investment funds sought to wrest control of the Tribune Co. bankruptcy case Tuesday in a move that threatens to intensify an already pitched battle between senior and junior creditors.

In a filing Tuesday with the U.S. Bankruptcy Court in Delaware, the group asked Judge Kevin Carey to deny a request by Tribune Co. management to extend its exclusive right to file a reorganization plan.

The group hopes to win the right to propose its own plan that would enhance senior creditor returns at the expense of the junior creditors.

Calling itself Credit Agreement Lenders, the group owns $4.4 billion of the $8.6 billion in debt Tribune Co. Chairman Sam Zell used to take the Chicago-based media company private in 2007.

It is composed of a large number of hedge funds and other investment firms, including such heavyweights as Angelo Gordon & Co., Oaktree Capital Management, Goldman Sachs Inc. and Kohlberg Kravis & Roberts.

Absent from the group are the big lenders, including JPMorgan Chase and Merrill Lynch, that also own senior debt from the Zell deal.

But JPMorgan, in filing its own objection Tuesday to management's request to extend its exclusivity, signaled its support for the Credit Agreement group, noting that "it is time for the parties ... to move forward without further delay."

The filings amount to a protest against Tribune Co.'s attempts to broker a deal between the senior creditors and a group of militant junior creditors led by a big, distressed-bond investor called Centerbridge Partners.

In late August, Centerbridge and other owners of $1.26 billion in junior bonds, challenged a proposed reorganization plan that would swap debt for equity to recapitalize Tribune Co., arguing that the plan would give them a mere "sliver of equity" for their claims.

To gain leverage, they threatened to challenge the 2007 buyout as an instance of "fraudulent conveyance," a legal term meaning the deal was doomed from the start.

If they could prove it, the judge would invalidate the $8.6 billion in claims owned by the senior lenders, leaving plenty of value to pay off the junior claims.

In October they got some heartening news: A fraudulent conveyance case in Florida resulted in a $600 million judgment against a set of senior lenders, including several involved in the Tribune case.

On Nov. 13, Tribune Co. asked the court to extend until March its exclusive right to forge a reorganization plan, partly so it would have time to work out a compromise between these combative creditor factions. But in their objection Tuesday, the Credit Agreement Lenders complained the Centerbridge group was dragging its heels and threatening to send the case into "a litigation morass of monumental proportions."

The senior group said it had already proposed a plan to Tribune Co. management, but the company hadn't acted on it. At the moment, the group complained, "there are no negotiations" and "no progress toward a consensual plan." Consequently, the group concluded, it should be allowed to propose its plan to the court directly.

Carey will take up the matter at a hearing Dec. 1. Tribune Co. declined to comment Tuesday.

Sources said the standoff is likely to focus the judge on a highly technical area of the law: Whether the junior creditors have legal standing to bring a fraudulent conveyance case in the first place.

The Centerbridge group, which is represented by its trustee, Law Debenture Trust Co., argued in its own filing Tuesday that Tribune Co. inappropriately used its subsidiaries to guarantee the leveraged-buyout debt, guarantees that form the basis of the lenders' seniority over the junior bondholders.

That put the subsidiaries at risk without giving them any value in return, since all money went to pay parent company shareholders, one basis for fraudulent conveyance.

The catch to this argument is that the junior creditors own notes issued by the parent company, not the subsidiaries, raising the issue of whether the Centerbridge group can legally claim it was harmed by something that happened at the subsidiary level.

The Credit Agreement Lenders signaled in their filing that they would challenge this point by proposing a plan that essentially ignores the junior creditors. They would reorganize the subsidiaries, including companies that own the Chicago Tribune, the Los Angeles Times, Tribune Co. TV stations and other assets, and form a new holding company owned by the senior creditors.

In doing so, they would pay off subsidiary trade creditors, buying their support. The old parent company and the junior creditors, meanwhile, would be left behind in court.

Sources said Law Debenture would likely argue that because the holding company's value derives from the subsidiaries, the junior creditors were, indeed, harmed by a possible fraudulent conveyance and should be able to bring a claim.

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