From Hellish Transaction to Chapter 11 Purgatory: Tribune Bankruptcy After One Year

By: Mark Fitzgerald On a December afternoon in 2007, real estate mogul Sam Zell ambled into a Tribune Tower auditorium packed with business reporters, Tribune Co. executives and Chicago Tribune staffers and announced, "I'm here to tell you that the transaction from hell is done." After Tribune had languished for months on the auction block with almost no serious offers, newspaper industry outsider Zell had engineered a complex deal to take the Chicago media giant private through an employee stock ownership plan structure and a payment of $8.6 billion, nearly every dollar of it borrowed.

There was no such dramatic scene a year later, Dec. 8, 2008 when Tribune Co. announced it had filed for Chapter 11 bankruptcy reorganization to get out from under a crushing debt burden of nearly $13 billion it could not possibly service with its steeply falling revenue.

The Tribune Co. bankruptcy turns one year old on Tuesday, and looks to be, if not exactly a bankruptcy from hell, certainly a complicated legal mess worthy of purgatory.

No one believes anymore, as Zell once hoped, that Tribune will emerge from bankruptcy by the end of this year. Tribune management has a plan that essentially puts the publishing and broadcasting company in the hands of its senior lenders and leaves it with debt it can handle. But it's been unable so far to square the circle of who gets how much and in what order.

Tribune's junior creditors are claiming the plan would leave them with just "a sliver" of the post-bankruptcy assets. Recently, they went even farther, suggesting the going-private deal was a "fraudulent conveyance," a legal term of art meaning the deal was so larded with debt that Tribune was insolvent from Day One -- and the senior lenders knew it, but financed the transaction anyway, and pocketed the fees.

Courts rarely recognize fraudulent conveyance claims, which in this case could shut senior lenders out of the post-bankruptcy divvying up, leaving more for the junior creditors. But the claim can give negotiating leverage.

Some senior lenders, meanwhile, are also unhappy. One group, made up of hedge funds holding $4.4 billion in Tribune debt are complaining about the pace of the bankruptcy, and demanding the right to offer their own restructuring plan to the court. But another group of senior lenders, including JPMorgan Chase Bank and Merrill Lynch, declined to join that claim.

Last week, the U.S. Bankruptcy Court judge in Delaware overseeing the case agreed to extend for another three months Tribune management's exclusive right to file a reorganization plan.

"It doesn't seem to me that (Tribune) has been in court too long without offering a plan," the judge, Kevin Carey, said, according to a Chicago Tribune report by Michael Oneal. Nevertheless, the judge also balked at the extension until March 31 that Tribune sought. The company was given until Feb. 28.

Even when things go right in the bankruptcy, Zell and Tribune management get catcalls from critics and commentators. In a deep recession and with the company in bankruptcy, Tribune managed to sell the Chicago Cubs, their iconic Wrigley Field venue and the company stake in a sports cable television network for $845 million, the most ever for a baseball team -- and still Zell heard criticism because the package did not go for $1 billion.

There are indications that the bankruptcy could get even bumpier as negotiations deepen among Tribune, the two factions of senior lenders and the junior creditors.

"It appears to me that everyone is beginning to stake out their positions," Judge Carey said in the most recent bankruptcy hearing, according to the Chicago Tribune account. "That either leads to agreement or war."