Tribune bond trustee looks to investigate 2007 leveraged buyout

By Caroline Salls

Pittsburgh, Aug. 27 - The Tribune Co. indenture trustee Law Debenture Trust Co. of New York requested court approval to conduct discovery in connection with the company's 2007 leveraged buyout transaction, according to a Wednesday filing with the U.S. Bankruptcy Court for the District of Delaware.

Law Debenture filed the motion on behalf of the holders of Tribune's 6.61% debentures due 2027 and its 7¼% debentures due 2096.

If the court does not approve the discovery motion, the trustee is asking it to order appointment of an examiner to investigate the LBO transaction.

LBO details

According to the motion, Samuel Zell became a director on Tribune's board on May 9, 2007 and chairman of the board and chief executive officer on Dec. 20, 2007.

The trustee said EGI-TRB, LLC, an entity formed for the benefit of Zell and his family, received warrants to purchase roughly 40% of Tribune's common stock under an LBO that spanned eight months, beginning in April 2007 and ending in December 2007.

The trustee said phase 1 of the LBO included execution of new credit facilities and a cash tender offer for nearly 50% of Tribune's outstanding common stock.

To finance the tender offer, Tribune entered into an $8.028 billion senior secured credit agreement.

Under phase 2 of the LBO, Tribune entered into additional credit facilities, the repurchase of any remaining common stock, and the issuance of a $225 million subordinated note in favor of Zell, with warrants to purchase Tribune's common stock.

In total, Law Debenture said the LBO "saddled the debtors with an overwhelming debt burden of more than $11 billion."

"The LBO - and the unsustainable debt burden it imposed on a business already in a secular decline - undoubtedly caused the debtors' demise," the indenture trustee said in the motion.

Deal flaws

Law Debenture Trust said the architects of the LBO, including Zell, now concede that the transaction was a mistake based on overly optimistic assessments of Tribune's business.

"Tribune commenced these Chapter 11 cases within a year of the LBO, leaving billions of dollars of pre-LBO debt unpaid," the trustee said in the motion.

Specifically, the trustee said the LBO did not provide the company with reasonably equivalent value in exchange for the $11.2 billion in secured debt it incurred, and "the majority of the LBO debt served only to cash out former shareholders for no consideration at all."

As a result, the trustee said the LBO and the obligations incurred in connection with the transaction constitute fraudulent transfers under the Bankruptcy Code, state law and Third Circuit precedent.

No information

Law Debenture said Tribune and its official committee of unsecured creditors have not conducted a complete factual investigation into the circumstances surrounding the LBO transaction, including the knowledge and intent of the bank lending group before the funding and closing of the transaction.

The trustee said it has asked for access to information on the LBO, but the parties involved have "consistently and affirmatively ring-fenced Law Debenture out of any process to obtain and use discovery to protect its bondholders' rights in these cases."

"Law Debenture, as fiduciary for one of the biggest creditor constituencies in these cases, and the constituency most harmed by the LBO, is entitled to the requested discovery," the trustee said in the motion.

A hearing is scheduled for Sept. 4.

Tribune, a Chicago-based media company, filed for bankruptcy on Dec. 8, 2008. Its Chapter 11 case number is 08-13141.

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