A group of creditors whose junior claims pre-date Tribune Company’s 2007 leveraged buyout (LBO) have sued the senior lenders who funded the LBO. The suit claims the LBO doomed Tribune to insolvency – and the big banks knew it.
A good bit of the complaint was filed under seal with the US Bankrupty Court in Delaware, the same court which is overseeing Tribune’s Chapter 11 case. The public filing is heavily redacted, with large black areas deleting confidential claims that the banks were aware of Tribune’s financial instability when they made $8 billion in loans for the buyout.
The lawsuit was filed by Wilmington Trust Co., acting as agent for the pre-LBO bondholders, who are owed $1.2 billion. The defendants are JP Morgan Chase, Merrill Lynch, Citicorp, Bank of America, Barclays, Morgan Stanley and some subsidiaries of those firms.
“Prior to the LBO, at any reasonable enterprise value, Tribune was more than able to support its existing senior bank debt of $2.8 billion, senior unsecured notes of $1.3 billion and the PHONES [the junior debt] of $1.2 billion. Of Tribune’s total pre-existing debt just prior to the LBO, $4.1 billion was senior in priority to the PHONES,” the suit stated. But the LBO nearly tripled that debt load to $13 billion and placed a total of $11.3 billion ahead of the PHONES in debt ranking.
That ranking is key. If the holders of the $1.2 billion in junior debt, the PHONES, can prove that the lenders knew the LBO would render Tribune insolvent, the court could move the junior creditors up in line for recovery.
The obvious question is, why would the banks fund a deal they knew wouldn’t work? The lawsuit claims it was for some $200 million in fees related to the LBO.