April 28, 2020

Chatham Asset Management and another fund called Brigade Capital Management have offered to swap $263 million of McClatchy debt for 100% ownership of the company as it emerges from Chapter 11 bankruptcy reorganization.

The so-called “stalking horse” bid was offered April 16, and the two companies said that they hope for action by early July. That means the company may entertain other, higher bids if it receives them during that time.

The two “first lien” debt holders, who must be paid before all other liens, are also throwing in another $30 million to cover legal and administrative expenses and have agreed to assume the obligation of short-term debt and what is owed to other creditors. No dollar amount is specified for the last two items, but the funds described the total value of their bid as “well in excess of $300 million.”

In a press release on the bid, McClatchy said, “Importantly, under terms of the proposed credit bid, McClatchy would remain one company, which will emerge from Chapter 11 having resolved its legacy debt and pension obligations, just as it set out to at the start of this process.” That appears to imply that under some other scenarios the company could be divided or individual papers sold, were there interested investors in a market.

After mounting financial pressure over several years, McClatchy filed for bankruptcy reorganization Feb. 13, citing its inability to make required contributions in 2020 to the pension plan for its 24,000+ employees and retirees.

Its 30 newspapers — including the Miami Herald, The Kansas City Star and The Sacramento Bee — continue to operate as usual as the bankruptcy case proceeds.

An “omnibus” hearing is scheduled for Wednesday, and many issues in the complex case remain to be resolved:

The Pension Benefit Guaranty Corporation

The reorganization envisions that the pension plan be turned over to the federal Pension Benefit Guaranty Corporation, an arm of the federal government funded by participating corporations rather than tax dollars that steps in to pay beneficiaries when a pension plan fails. But going in, the pension insurer and McClatchy were at odds over how much the company would pay back monthly to the PBGC after it emerges from bankruptcy.

At the first hearing after the filing, the PBGC asked the court to examine a “possible fraudulent transfer” of debt to Chatham, alleging the company effectively was already insolvent. If successful, the objection would advantage the PBGC and stick Chatham with payments to the pension fund.

Supplemental pensions for retired executives

In early January, before McClatchy filed for bankruptcy protection, it abruptly discontinued paying a “non-guaranteed” supplemental pension plan to retired executives. A group headed by former Knight-Ridder CEO Tony Ridder is trying to recover at least some of the money he and others are losing.

I spoke to Ridder some weeks back from his winter home in South Florida. His group represents about 200 Knight-Ridder and McClatchy retirees (both had similar executive bonus pension plans when McClatchy bought the Knight-Ridder newspaper chain in 2006).

The PBGC and Chatham do not want to be saddled with continuing those payments. But Ridder’s group, he told me, contend the benefits are an obligation, and that beneficiaries, including some widows in their 80s, rely on it as income.

New complications from the pandemic

The bankruptcy filing preceded the COVID-19 crisis and resulting recession. The steep downturn in print advertising that followed had not figured in the proceedings until mid-April.

McClatchy has moved for extensions on administrative costs it is incurring.

Chatham and Brigade objected, charging that the company is stalling and that the meter is running on high legal and administrative fees, eating up the value of the company they propose to buy. So they want the federal bankruptcy judge, Michael Wiles, to speed the case along.

In the reorganization, the McClatchy family will lose their control of the 163-year-old company and the small value of the public company’s stock they had retained. Shares have stopped trading and the reorganized company is expected to be private.

It is unclear whether Chatham and Brigade would retain McClatchy CEO Craig Forman and other members of his executive team if their bid is successful.

Rick Edmonds is Poynter’s media business analyst. He can be reached at redmonds@poynter.org.

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Rick Edmonds is media business analyst for the Poynter Institute where he has done research and writing for the last fifteen years. His commentary on…
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