Pension agency questions about McClatchy’s largest lender threaten to slow bankruptcy process

Bankruptcy proceedings for McClatchy Co. began Friday with a key government agency saying it opposed quick resolution of pension matters because of concerns about a 2018 transaction between the company and its largest creditor, Chatham Asset Management.

The Pension Benefit Guaranty Corporation, which takes over pensions in the event of company distress, argued against a request by McClatchy and Chatham to move immediately to mediation. The judge delayed a decision on the mediation request until Tuesday.

“We are not close,” Kimberly E. Neureiter, an attorney for the PBGC, told Judge Michael E. Wiles.

A nearly finished deal could be in jeopardy if the proceedings last longer than 60 days, when, under the company’s financing agreement with Encina Business Credit, McClatchy must choose which path to take as it proceeds — a sale or a modified restructuring plan, lawyers for McClatchy and Encina told the judge.

Van C. Durrer II, a lawyer for McClatchy, told Wiles that remaining issues with creditors could be ready by Tuesday, but cautioned, “We have yet to figure out what governance of the company looks like on the other side of bankruptcy.”

Under a restructuring plan submitted to the court early Thursday, creditors and McClatchy would roll more than $218 million in debt into new debt bearing a 10 percent interest rate.

A larger amount of debt would be converted into ownership stakes in a new privately held company led by Chatham, with the McClatchy family losing ownership of a company it founded during the California Gold Rush.

Roughly 7 million shares of McClatchy stock would be canceled. The company wants the federal government to take on McClatchy’s pension plan.

The PBGC did not object to McClatchy’s use of $50 million in new financing from Encina to help the company operate during the bankruptcy proceeding. The court granted McClatchy approval to access $12.5 million of the $50 million and is scheduled to rule on the remaining funds March 9.

But the pension agency asked the court for time to investigate a complex 2018 transaction between McClatchy and Chatham.

The PBGC said in a court filing that at the time of that transaction, “the Debtors were already insolvent” but allowed Chatham to convert $275 million in unsecured debt into more protected secure debt. The debt had been due in 2022; the transaction pushed that back four years, to 2026.

“As a result of the transaction, the Debtors went from owing a little over $344,000,000 of secured debt to over $670,000,000 of secured debt,” the PBGC filing said, adding that the move put repaying Chatham ahead of McClatchy’s pension obligations.

“Publicly available information regarding the 2018 Transaction raises serious concerns about whether fraudulent transfers may have occurred, or whether CAM’s (Chatham’s) claims should be partially or completely subordinated,” said the filing from Joseph K. Grekin, a lawyer with Schafer and Weiner, which is serving as outside counsel for the PBGC.

Andrew N. Rosenberg, a lawyer with Paul, Weiss, Rifkind, Wharton & Garrison LLP and representing Chatham, said that McClatchy publicly disclosed the transaction at the time and that Chatham had no representation on McClatchy’s board.

The 2018 transaction gave McClatchy time to seek a suitor and to negotiate for relief from the IRS, Durrer II argued for McClatchy. The PBGC has long been aware of the transaction, he told the judge.

The case is being heard in U.S. Bankruptcy Court for the Southern District of New York.

Absent the motions by the PBGC, most of Friday’s hearing was standard fare, with all sides agreeing on letting McClatchy pay its employees and vendors and on establishing procedures for canceling stock.

A lawyer with the Wagner Law Group, participating by telephone, said he was likely to bring a motion seeking to unfreeze about $1.3 million in payments now in arrears and due to a special group of about 450 retirees under a “non-qualified” pension, which provided supplemental payments to former executives and was frozen in January.

The lawyer said he was representing Anthony Ridder and George Riggs. Riggs was a publisher of The Contra Costa Times and the San Jose Mercury News when owned by Knight Ridder.

Ridder was CEO and chairman of Knight Ridder until it was acquired in 2006 by McClatchy.

Editor’s note: The bankruptcy judge hearing McClatchy’s case is Michael E. Wiles. His name was incorrect in earlier versions of this story due to an editing error. (Updated 6:15 pm ET, February 18.)

This story was originally published February 14, 2020 at 7:48 AM with the headline "Pension agency questions about McClatchy’s largest lender threaten to slow bankruptcy process."