McClatchy followed rules in refinancing two years before bankruptcy, investigation finds
McClatchy Co.’s board of directors and senior executive leadership acted properly in 2018 when the company refinanced its debt, an investigation conducted as part of the local news company’s bankruptcy case has found.
The report filed by Albert Togut, whose law firm began investigating after questions were raised about the transactions, comes just days before two events that could determine the fate of the nation’s second largest local news company.
McClatchy, which filed for bankruptcy in February, will learn Wednesday who is serious about buying the company, as binding bids from interested parties are due. In the case of multiple bids, an auction will be held a week later.
Also Wednesday, Judge Michael E. Wiles is scheduled to decide at a hearing whether a committee of less protected, or “unsecured,” creditors has standing to bring a lawsuit against McClatchy’s board of directors, former senior leadership and its largest creditor. Such a ruling could delay the sale, which has already been complicated by the economic downturn caused by the pandemic.
Wiles, who sits on the U.S. Bankruptcy Court for the Southern District of New York, will weigh Togut’s report against the unsecured creditors committee’s allegations that McClatchy was insolvent at the time of the refinancing and that its leadership breached a duty to investors by placing the interests of Chatham Asset Management, its biggest investor and creditor, above those of other stakeholders.
Togut’s report, also shared with a federal mediator, concluded that McClatchy was solvent at the time of the transactions and that the board and senior leaders exercised their best business judgment when refinancing the debt.
Togut said his firm reviewed nearly 24,000 documents from McClatchy, Chatham and investor Leon Cooperman, and whittled them down to 7,200 documents relevant to his investigation. He held repeated interviews with McClatchy’s chief financial officer at the time, Elaine Lintecum, as well as chief executive Craig Forman, the report says.
“Potential causes of actions can always be postulated, but based on the investigation to date, we believe they are unlikely to succeed if pursued,” Togut wrote.
Significantly, the report said that Chatham was not given favorable treatment. To the contrary, the company approached at least 10 potential lenders and received an offer from at least one, but those terms were worse than what Chatham offered, the report said.
The Pension Benefit Guaranty Corporation, the federal agency that is being asked to assume administration of the company’s pension program, questioned the 2018 transactions on the first day of the bankruptcy process. The PBGC is the largest creditor on the unsecured creditors committee.
After the PBGC asked for an investigation, McClatchy hired Togut, which told the court that it would operate independently.
On Monday, the unsecured creditors committee told Wiles he’s their only chance to get a fair shake in a bankruptcy case that they say favored large hedge funds that might ultimately own the news company.
“Make no mistake: if the committee is not granted standing to pursue the proposed claims, they will never see the light of day and the unsecured creditors will be permanently stripped of any recourse for the harm they suffered,” wrote Kristopher M. Hansen, an attorney for Stroock & Stroock & Lavan LLP, which represents the unsecured creditors committee.
Togut’s report paints the clearest picture yet of how McClatchy’s crushing debt drove it to bankruptcy. It details how Bank of America ended the company’s credit line, forcing McClatchy to seek a new source of emergency lending in case of cash-flow problems.
Wells Fargo eventually stepped in, but it quickly became apparent that, with interest rates rising and banks pulling back from the legacy newspaper industry, McClatchy needed to refinance. The idea was to buy the company time to fully transition to digital media.
Togut’s report provided a detailed comparison of McClatchy’s finances before and after the restructuring, which added about $45 million to a debt load that reached more than $700 million before the bankruptcy filing in mid-February.
About half of the company’s debt was due in 2022, but the refinancing pushed it to 2026.
Togut acknowledged that Chatham gained most-protected status in the refinancing but said that wasn’t the reason for the deal.
McClatchy’s purchase of the much larger Knight Ridder chain 14 years ago left the company with hundreds of millions of dollars in debt as well as an outsized pension obligation. McClatchy cited both legacy burdens when it filed bankruptcy.
But Togut’s report revealed an additional legacy from the Knight Ridder purchase, this one weighing heavily on McClatchy’s attempts to refinance its debt.
A covenant, or restriction, added in 1997 — before McClatchy’s ownership — stipulated that when new debt was incurred, the same collateral offered to investors who bought it would apply to holders of the Knight Ridder debt. That would put the new debtholders in a protected status, even though they were originally less protected investors.
A large section of text about that Knight Ridder debt that followed was redacted in the report, suggesting it remains a sensitive issue in the bankruptcy negotiations, where protected and less-protected creditors fight to recover as much value as they can.
In other action Monday, the company pushed back the date for the judge to rule whether McClatchy has met the requirements for a distressed termination of its pension plan, which would allow the PBGC to take it over. The pension question will be heard during a July 14 hearing rather than Wednesday as originally planned.
“Rescheduling court dates is not uncommon and this change is not expected to impact the overall timing of McClatchy’s emergence from Chapter 11 (bankruptcy),” the company said in an emailed statement, reaffirming that only a handful of high-worth individuals would see any change to their qualified pensions.
McClatchy, the nation’s second largest local news company, owns 30 media titles in 14 states and Washington, D.C., including the Miami Herald, the Kansas City Star, the Sacramento Bee, the Charlotte Observer, the (Raleigh) News & Observer and the Fort Worth Star-Telegram.
This story was originally published June 29, 2020 at 4:21 PM with the headline "McClatchy followed rules in refinancing two years before bankruptcy, investigation finds."
