Tribune bondholders call for buyout probe

Allege Sam Zell's takeover caused company's insolvency

NEW YORK -- Bondholders of Tribune Co. have asked a U.S. bankruptcy judge to investigate the 2007 buyout of the bankrupt media company by Sam Zell, saying it caused the company's demise, court documents showed.

The leveraged buyout of the owner of the Chicago Tribune and Los Angeles Times was responsible for rendering the company insolvent or leaving it with "unreasonably small capital", bondholders said in a filing with the U.S. Bankruptcy Court for the District of Delaware on Wednesday.

Tribune Co. in 2007 agreed to an $8.2 billion buyout led by real estate magnate Zell, who is now the chief executive of the company. Leveraged buyouts, acquisitions made using large amounts of borrowed money, saddled scores of companies with massive debt in the years leading up to the 2007 credit crunch.

According to the filing, Tribune's LBO imposed "unsustainable debt" on a business already in decline and did not provide the company and its subsidiaries with "reasonably equivalent value in exchange for the $11.2 billion in secured debt they incurred." As a result, the LBO may have been a "fraudulent conveyance," the filing said.

Tribune also relied on "obviously unrealistic assumptions" showing a reversal in the downturn in the company's business, the filing said.

"We have been working with all of our constituencies, including our noteholders, to address all of the issues inherent in a plan of reorganization for our company," Tribune spokesman Gary Weitman said in a statement.

"Our goal is to develop and implement a plan that maximizes the value of the company for all parties in interest and treats all creditors fairly," he said.

The bondholders, represented by Law Debenture Trust Co of New York, said neither the Tribune Co nor its unsecured creditors committee had investigated the leveraged buyout, arguing that the committee had a fiduciary duty to do so.

Law Debenture also said JP Morgan Chase, one of the lenders, had prevented it from obtaining key information about the deal. It asked the court to compel Merrill Lynch, JP Morgan and Citigroup to produce the documents it said it needs to examine the LBO.

A spokesman for JP Morgan declined to comment.

The bondholders asked the court to appoint its own examiner if it denies their request.

Tribune filed for bankruptcy last December.

Taking on the LBO sponsor, Zell, rather than going after Tribune's assets, could be a "game changer" in the bankruptcy process and significantly improve bondholders' recovery levels from LBO'd firms if successful, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.

"There's billions and billions of dollars of LBO transactions, many of which are on the verge of bankruptcy or at risk of bankruptcy so ... it could create a legal strategy for bondholders in other instances," LeBas said.

"If you can basically try to extract cash from the sponsor of an LBO, you have a much greater asset pool to try to go after in bankruptcy," he said.

Fraudulent conveyance claims have been successfully brought before by creditors in LBO cases, such as a 1988 action against Weiboldt Stores in Chicago, said James Spiotto, a partner with Chapman & Cutler in Chicago.

Tribune's creditors would have to prove that after the LBO, "the company either was rendered insolvent or had too little capital for the business in which it was engaged," he said.

"Not every company that goes into bankruptcy and has financial difficulties after an LBO or other type of transaction is a fraudulent conveyance, but clearly it raises the issue when entry into bankruptcy is close in time to the LBO," he said.
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