Amid all of the activity at Tribune Company as management tries to win FCC waiver approvals and complete a complicated restructuring, while simultaneously trying to turn around slumping ad sales for its newspaper and TV properties, the company now also has to deal with some hedge funds trying to cash in on the tumult. They have served Tribune with default notices on hundreds of millions in bonds due in 2029, claiming the company has to pay up now because of its sales of some TV stations and plans to sell the Chicago Cubs. If the funds were to succeed, Tribune would be forced to immediately pay off the 1.26 billion face value, although the securities have been trading for less than half that.
According to an SEC filing by Tribune, a letter from two hedge funds who claimed to own about 37% of the exchangeable subordinated debentures in question said they were issuing a "notice of default," based on purported violations by the company of the "maintenance of properties" clause of the issue. A second letter a few weeks later extended the claim to a third hedge fund, with the three claiming to own 55% of the securities.
Tribune says the claims are without merit, noting that another section of the terms for the issue clearly states that the covenant does not prevent the company from discontinuing the use of any properties or disposing of them if management determines there is a business reason to do so.
RBR observation: This is a standard game for certain hedge funds. They buy up large amounts of a bond issue with a far-out maturity date that is trading at a deep discount to its face value. Then they have their lawyers concoct an interpretation of the issuance terms which, if upheld in court, would amount to a technical default, even though the company is current on any and all payments due. The ploy doesn't work often. But it must succeed once in a while, since the hedge funds keep playing the game.