Creditors move to buy McClatchy, opening door to bidders interested in the whole company

McClatchy’s largest creditors offered to buy the bankrupt media company Thursday, a move that, if approved, would kick off an auction among parties interested in owning the nation’s second largest local media company.

The court filing comes as the coronavirus crisis has wrecked the global economy, endangering the future of McClatchy and other media companies. McClatchy and its creditors have also watched as legal fees have quickly piled up in the bankruptcy case filed in February.

McClatchy announced furloughs and executive compensation cuts last week, none of which affected journalists.

The filing by creditors Chatham Asset Management and Brigade Capital Management set a sale price “well in excess” of $300 million and a deadline of no later than early July.

McClatchy, which filed Chapter 11 bankruptcy in February, began seeking potential buyers earlier this month and more than 20 parties are “engaged in our process,” said Craig Forman, McClatchy’s president and chief executive officer.

McClatchy said in a news release that, under the terms of the discussions, it would remain one company, free of the two main financial burdens that led to the bankruptcy filing, including the pension obligations.

“We appreciate the support of our principal existing lenders, who have come to the table with an offer that is generally consistent with our goals of addressing our legacy balance sheet issues and emerging from Chapter 11 as a viable going concern, while continuing to provide strong independent, local journalism in the public interest,” Forman said. “Our mission of producing essential local news and information for the communities we serve has never been more vital.”

Thursday’s court filing does not address McClatchy’s negotiations with other parties interested in a potential sale of the company. It focuses on trying to accelerate the pace of the costly bankruptcy proceedings, which have now reached the 60-day mark.

The filing in U.S. Bankruptcy Court for the Southern District of New York was made in opposition to McClatchy’s recent motion to have all lawyers in the case take a 15 percent cut in fees and change the terms of a short-term financing deal.

“The debtors must not delay the commencement of a formal sale process to limit further destruction of value to the debtors’ estates,” the lawyers wrote.

The two creditors filed a motion asking Judge Michael E. Wiles to consider them a “stalking horse bidder.” In bankruptcy proceedings, a stalking horse provides a starting offer that effectively becomes a floor for any further offers.

The creditors would purchase the company as is. They would continue to hold the most protected first-lien debt worth $263 million, and add another $30 million in new money. The creditors would assume or refinance McClatchy’s existing revolving debts and what it owes to other creditors.

That’s similar to the original bankruptcy filing, which preceded the economic destruction brought by the pandemic. Chatham and Brigade originally stood to become the owners of a privately held company upon exit from bankruptcy, shedding 55 percent of McClatchy’s debt as well as its expensive pension plan.

The parties want the federal Pension Benefit Guaranty Corporation to take over administration of the pension plan, but from the first day of proceedings, the PBGC has raised questions.

The agency alleges that McClatchy was functionally insolvent in 2018 when it restructured its debt with Chatham, which the PBGC says improperly moved Chatham to a protected, first-in-line status. Both have denied the allegation, with McClatchy noting that it was actively seeking buyers or partners at the time.

In bankruptcy, a creditors committee was formed, a prominent media-savvy mediator was appointed and talks between the company and its less-protected creditors and the PBGC are ongoing.

A group of about 220 former executives from McClatchy and Knight Ridder, which was acquired by McClatchy in 2006, joined the creditors committee and has sought to reinstate special pensions for former senior company officials that were terminated in January ahead of the bankruptcy filing.

The number of lawyers has grown since mid-February, and Chatham said in a filing last week that the case now has one of the largest investigation budgets in the history of the Southern District’s bankruptcy court.

In that filing, Chatham was seeking to block the creditors committee’s request to add a third financial analyst to its investigation of the 2018 transaction.

In Thursday’s filing, lawyers for Chatham and Brigade said that, through March 29, professional fees had reached approximately $9 million, which likely exceeded McClatchy’s operating income over the same period.

Sacramento-based McClatchy operates newsrooms in 30 markets, including the Miami Herald, the Kansas City Star, the Sacramento Bee, the Charlotte Observer, the (Raleigh) News & Observer and the Fort Worth Star-Telegram. The company has been controlled by the McClatchy family since the time of the California Gold Rush.