A federal bankruptcy judge Wednesday delayed a ruling on whether a group of creditors can sue McClatchy Co. in connection with a 2018 debt refinancing until after potential buyers submit their bids for the company.
McClatchy expected to receive multiple bids before Wednesday’s midnight deadline, including from Chatham Asset Management, the hedge fund that is the company’s largest creditor, Van C. Durrer II, McClatchy’s lead bankruptcy lawyer, told the court.
“We’re confident we will have a robust process,” Durrer said.
McClatchy had asked Judge Michael E. Wiles to dismiss an attempt by a committee of less protected, or “unsecured,” creditors to pursue claims against the company’s board of directors and some senior leadership.
The creditors committee alleges that McClatchy was insolvent at the time of the 2018 refinancing, a transaction that moved Chatham to a most-protected status in the event of default or bankruptcy, and that company leadership thus had a duty to consider all stakeholders, including the less-protected creditors.
McClatchy has pointed to evidence proving solvency and argues that further litigation would be costly and could slow its efforts to exit Chapter 11 bankruptcy.
Wiles said he would issue his decision on Monday. The judge said he wants to be kept updated on the status of mediation, which continues in the 4 ½-month-old case, and wants to see details on the bids.
“Before I do anything, I just wanted to understand what the range of values are that are being offered,” Wiles said.
He warned that his decision was unlikely to make all parties happy.
“I don’t know if that will help you or hurt you in your discussions,” Wiles said. He called it “extremely unlikely” that he would fully grant the creditors committee’s motion, nor would he rule in a manner “that throws them away for nothing.”
During an often-tense virtual hearing that ran for three hours, the judge asked all sides several pointed questions about why no solvency analysis has been done.
“It is bizarre to me,” he said.
McClatchy’s lawyers argued that solvency is the ability to make payments on obligations, which the company has done all along. Attorney Kyle Ortiz likened it to leaving law school deep in student loan debt with the expectation that it would be paid off over time.
During its refinancing deals, McClatchy twice provided a clean bill of health from its auditor, Deloitte & Touche LLP, indicating that it was solvent.
McClatchy has argued that allowing the unsecured creditors committee to pursue claims would “serve as a distraction” from the sale process. The company declined to comment on Wiles’ decision to delay, referring instead to an earlier statement.
“July 1 is the deadline for bid submissions as part of our Chapter 11 process,” the statement says. “We have continued to engage with a number of parties over the past few weeks and are encouraged to see the interest expressed in McClatchy. After the deadline, each bid will be carefully and confidentially reviewed by the company and our advisors. If multiple qualified bids are received, the court-supervised auction will be held on July 8.
“By July 15, we will notify the court of the successful bidder and on July 24, a hearing will be held to confirm the winning bid. We will share more information when we have a definitive outcome.”
Other milestones remain between now and July 24, not the least of which is the judge’s decision. On July 14, Wiles is scheduled to rule on whether McClatchy has met the qualifications for a “distressed termination” of its pension plan. And anyone seeking to bring a claim against McClatchy faces a court-ordered deadline of July 10.
The 2018 transactions have been at issue since the day McClatchy filed bankruptcy. The Pension Benefit Guaranty Corporation, the federal agency that would take over administration of McClatchy’s pension, raised questions Feb. 14, before it joined the unsecured creditors committee.
Durrer noted during the hearing that the PBGC was told of the 2018 refinancing at the time and could have declared that McClatchy was unable to meet its pension obligations, but did not.
Wiles scolded the PBGC’s deputy general counsel, Kartar Khalsa, for arguing that the agency had no part in the 2018 transactions.
“I think their main point is not so much that you legally are bound for ratifying (the deal), but as somebody who is accused of engineering a transaction to disadvantage a few, it is very unusual for such a person to call you in advance and say, ‘Hey, are you OK with this?’ ” Wiles said.
Daniel Fliman, a lawyer with Stroock & Stroock & Lavan LLP representing the creditors committee, argued that McClatchy’s balance sheet was so bad at the time of the refinancing that Chatham effectively called the shots.
“It was very clear that Chatham was the only show in town,” said Fliman, alleging that McClatchy’s leadership tried to “for lack of a better word, bribe” Chatham into a deal to protect the shares of voting stock controlled by the founding McClatchy family.
James Tecce, a lawyer representing Chatham, argued to Wiles, who sits on the U.S. Bankruptcy Court for the Southern District of New York, that there were two other parties offering to refinance McClatchy’s debt and that the hedge fund, which has been a lender to McClatchy since 2009, was “not in the driver seat in any of these negotiations.”
Durrer went on to detail for the judge how a well-known private equity firm had offered to refinance McClatchy’s debt at 150 basis points higher, but with restrictions that would have quickly led to default.
That proved, Durrer argued, that Chatham’s refinancing terms were the best available.
McClatchy, the nation’s second-largest local news company, believed that it could avoid bankruptcy as late as December 2019, when a legislative attempt at pension relief failed, Durrer said.
At that point, facing a quarterly pension payment of $120 million due in September 2020 and with anticipated operating revenues of about $100 million, the company decided Chapter 11 was the best option, he said.
The PBGC has the largest claim among the members of the unsecured creditors committee. Other members are a group of newspaper carriers who filed suit more than a decade ago and former Knight Ridder and McClatchy executives and senior employees who were owed an estimated $118 million in supplemental pensions when McClatchy filed for bankruptcy.
McClatchy is not likely to comment publicly on the sale proceedings until a winner is announced because of non-disclosure agreements. But Durrer did tell the judge that there would be greater clarity about McClatchy’s future by 12:01 a.m. Thursday.
“We’re going to be a lot smarter as we emerge at midnight ... to know where we are,” he said.