Tribune and its senior creditors have filed an amended plan of reorganization that the bankrupt media company hopes will solve problems that prevented a Delaware judge from approving a version of the plan in October. In court documents filed 11/18, the company expressed hope that the new plan soon could pave the way to an exit from the nearly three-year-old Chapter 11 proceeding. That will depend, in part, on how U.S. Bankruptcy Judge Kevin Carey responds to a new proposal. Carey in October blessed part of a controversial settlement at the heart of the plan in which senior creditors would pay junior creditors $534 million, including $431 million for dissident noteholder Aurelius Capital Management.
However, Carey has so far rejected both competing reorganization plans. Carey’s decision leaned toward the plan supported by Tribune’s senior creditors, Oaktree Capital Management, Angelo, Gordon & Co, and JPMorgan Chase Bank, along with Tribune management and the Official Committee of Unsecured Creditors. But one of his complaints about that plan was that it was unfair to holders of some deeply subordinated notes known as PHONES.
The new plan proposed by Tribune, the Official Committee of Unsecured Creditors, lender JPMorgan Chase and hedge funds Oaktree Capital Management and Angelo, Gordon & Co., makes no attempt to iron out the latest disputes (see below). Instead, it proposes paying the junior creditors the original $534 million Carey blessed and letting them fight over who gets what at the judge’s direction. Meanwhile, they say, the company would be free to emerge from bankruptcy without further delay.
To facilitate all of this, the plan anticipates setting up a formal “Allocation Dispute Protocol” under which the judge could oversee litigation of the disputes and reallocate the settlement proceeds accordingly before the company emerges. He could also set the disputes aside until after the company emerges and hear the cases later. In that instance, the plan would reserve up to $215 million of the settlement proceeds to be distributed when the disputes are resolved.
Tribune Chief Restructuring Officer Don Liebentritt said in a note to employees that the company will also ask the judge for an accelerated timetable for approval of the plan at a hearing in Delaware 11/22.
Cary stirred up a fresh set of disputes when he ruled that PHONES should be able to collect at least partial recovery of a claim with a face value of $1.2 billion. That opened the door to a parallel demand from Tribune Chairman Sam Zell, whose affiliate owns a $225 million note with similar subordination provisions. That note stemmed from the Chicago billionaire’s ill-fated $8.2 billion leveraged buyout of the company in 2007.
Until Carey’s ruling, the PHONES and Zell had been granted nothing in the settlement. But his decision means they might be entitled to more than $200 million in recovery, which would have to be carved out of the recoveries of other junior creditors like Aurelius and a large group of retirees.
Given the stakes, the ruling will almost certainly lead to new litigation. On 11/14, Aurelius and its allies asked the judge to reconsider his findings involving the PHONES, arguing that he had only been presented with a partial reading of the subordination provisions. Separately, Aurelius served notice that it was appealing the judge’s ruling on the fairness of the settlement.
The potential litigation will likely have major consequences for the various players among the junior creditors. The retirees, for instance, could see their recovery slip from $37.8 million to $22.9 million, plan documents said. The Aurelius-led noteholders, who have $1.3 billion in claims, could see a recovery of $467 million under a best-case scenario. But in a worst case the proceeds would shrink to $253 million, which would be a bitter pill for a group that has spent millions to defeat the original $431 million settlement, which it called inadequate.
Tribune said it will honor another of Carey’s issues with the original plan by removing a provision that would have protected employees from pending creditor suits targeting former shareholders who sold stock in the buyout. The company tried to protect those who sold stock in their 401(k) accounts and to shield the first $100,000 of employee stock sold otherwise. But Carey said he couldn’t legally approve the provision.
Liebentritt said the company was working with the creditors’ committee on another solution to protect employees.
Documents said the new plan will require partial re-solicitation of votes from creditors. It proposed that the judge hold a hearing to approve voting procedures 12/13, followed by a voting deadline of 1/20/12. If all goes as planned, it would allow the judge to schedule confirmation hearings the first week of February.