By Michael Oneal | After 16 months in bankruptcy court, Chicago-based Tribune Co. filed a restructuring plan Monday that would officially transfer control of the media conglomerate from real estate magnate Sam Zell to a group of large banks and hedge funds led by JPMorgan Chase and distressed debt investor Angelo, Gordon & Co.

But even before Tribune Co. lawyers could put the final touches on the documents, a large group of disgruntled senior creditors in the case led by Oaktree Capital Management attacked a settlement proposal at the heart of the plan and asked the court for permission to file an alternative restructuring scheme.

As outlined in a settlement document filed April 8, the Tribune Co. compromise plan would hand 91.2 percent of the company’s value to its senior creditors and 7.4 percent to a group of junior noteholders led by hedge fund Centerbridge Partners.

The senior group would be getting approximately 62 cents on the dollar for $8.6 billion in claims and the junior group would get 35 cents on the dollar for claims originally valued at $1.3 billion. Up to $150 million in claims held by trade creditors to Tribune Co. subsidiaries would be paid 100 percent in cash.

The Committee of Unsecured Creditors in the case has supported the settlement and has agreed to suspend its motion asking for permission to sue the company over the propriety of the 2007 leveraged buyout that helped tip the company into Chapter 11 in December 2008.

In a separate filing Monday, Law Debenture Trust Co., the trustee for the Centerbridge group, also agreed to withdraw a motion to claw back $25 million fees Tribune Co. has been paying through a non-debtor subsidiary to JPMorgan and the other senior lenders to the LBO transaction. Those payments had been suspended but would be resumed under the agreement.

In a note to employees, Tribune Chief Executive Randy Michaels acknowledged that the plan still hinges on continued negotiations with creditors but expressed confidence that the company will succeed in pushing it through.

“We believe the plan will be approved and that we will be able to emerge from bankruptcy later this year,” Michael said.

What became clear Monday, however, is that the hoped-for “consensual resolution” to Tribune Co.’s Chapter 11 case Tribune Co. has yet to materialize. Despite months of trying, the company still must persuade a large number of its most senior debt holders that it is in their best interest to strike a settlement with a contentious array of junior creditors.

The Oaktree group on Monday attacked the settlement agreement struck last week between JPMorgan, Angelo, Gordon, Centerbridge and Tribune Co. as “dead on arrival.”

The group, which said it represents $3.6 billion, or 42 percent, of the most senior level of Tribune Co. debt, said the compromise unfairly offered Zell, the Tribune Co. board of directors and lenders led by JPMorgan immunity from legal claims arising from the controversial 2007 LBO without asking for anything from them in return.

The group also decried a proposal in the settlement agreement that would set aside as much as 7.5 percent of the new company’s equity for future management compensation programs, a move that would dilute the value of other new shareholders in a reorganized company like Oaktree. And it criticized a clause in the plan that would use funds from the Tribune Co. estate to pay off millions in legal and other fees generated by Centerbridge and Law Debenture.

 ”This is a settlement made possible with ‘other people’s money,’” the group’s filing said.
Tribune Co., which owns the Chicago Tribune, said the compromise plan would allow the company to reemerge from bankruptcy with a new, manageable balance sheet and plenty of cash to invest in the business. It would once again be a public company with stock eventually registered and traded.

The employee stock ownership plan at the heart of the leveraged buyout structure would officially go away and a warrant owned by Zell that would have allowed him to assume control of 40 percent of the company’s equity for a total investment of $590 million would be “extinguished.”

The plan did not address Zell’s future with the company or that of his management team. Those decisions would be made later by a board of directors picked by the senior creditors.

Although Angelo, Gordon, Oaktree’s former ally among the senior creditors in the bankruptcy tussle, signed on to the Tribune Co. agreement, it left behind a large group of other opportunistic hedge funds who have bristled at the idea of carving out as much as $451.4 million out of the company’s estimated $6.1 billion in value to pay off junior creditors led by Centerbridge with more than $1.2 billion in claims.

At issue in the case is a claim by various groups of junior creditors that Zell’s $8.2 billion leveraged buyout was a prime example of “fraudulent conveyance,” meaning it left the company insolvent from day one. If proven, such a claim would allow the bankruptcy court to invalidate the $8.6 billion in claims held by senior lenders to the deal (led by JPMorgan Chase) and those who subsequently bought pieces of that debt on the open market (opportunists like Angelo, Gordon and Oaktree).
 
The junior creditors have also claimed that the deal represented a breach of fiduciary duty by Zell and Tribune’s board, since they were supposed to represent the interests of existing bondholders who were subordinated by the deal. Finally, they have said that the lenders to the deal “aided and abetted” that breach by lending to the deal.

Junior creditors had been pressing these claims to gain leverage against the senior group in settlement negotiations. But once a deal was struck, they agreed to drop all charges. In return for giving the Centerbridge group and other junior creditors a significant chunk of the company’s value, the plan would give senior creditors and Zell indemnity from any claims arising from the leveraged buyout.

But the Oaktree group balked at the deal and in Monday’s filing drew a line between investors who bought the debt in the open market and lenders like JPMorgan, who collected more than $2 billion in interest payments and fees before the heavy debt burden from the deal helped push Tribune Co. into bankruptcy.

The settlement agreement, the filing said, proposes to indemnify Zell, the board, JP Morgan and others, despite the fact Zell and the board are being asked to pay nothing into the settlement and JP Morgan has already been paid handsomely in fees and interest as a result of the deal.

Casting themselves as a group of innocent bystanders who simply bought the debt in the aftermarket, the Oaktree contingent asks why they should be liable for claims against the senior lenders, Zell and the company’s board.

“If a material settlement payment is in order,” the document says, “all parties allegedly responsible (including Zell, JPMorgan and others) must make a proportionate contribution to the settlement.”