McClatchy files bankruptcy to resolve legacy debt, pension obligations

By Caroline Salls

Pittsburgh, Feb. 13 – McClatchy Co. made a pre-packaged Chapter 11 bankruptcy filing Thursday in the U.S. Bankruptcy Court for the Southern District of New York to seek approval of a restructuring plan with its secured lenders, bondholders and the Pension Benefit Guaranty Corp.

According to a news release, the company will continue to operate in the ordinary course of business during the Chapter 11 proceedings.

In conjunction with the bankruptcy filing, McClatchy obtained a commitment for $50 million in debtor-in-possession financing from Encina Business Credit which, coupled with normal operating cash flows, provides ample liquidity for the company and all of its local news outlets to operate as usual and fulfill ongoing commitments to stakeholders.

The DIP financing is scheduled to mature 18 months from closing.

Interest will accrue at Libor plus 350 basis points. The applicable margin for letters of credit will be 325 bps.

The company said it aims to emerge from bankruptcy in the next few months.

Restructuring progress

“McClatchy remains a strong operating company with an enduring commitment to independent journalism that spans five generations of my family,” board of directors chairman Kevin McClatchy said in the release.

“This restructuring is a necessary and positive step forward for the business, and the entire board of directors has made great efforts to ensure the company is able to operate as usual throughout this process.”

In the three years ended in December, the company said it reduced its operating expenses by $186.9 million in efforts to stabilize operating cash flow amid secular industry headwinds that have battered newspaper advertising revenues. This focus on cash flow allowed the company to pay off $153.5 million in debt.

“While there is still more work to be done, we are pleased with the progress to date, and are appreciative of our ongoing dialog with our lenders and the PBGC,” president and chief executive officer Craig Forman said in the release.

“Moreover, we expect there will be no adverse impact on qualified pension benefits for substantially all of the plan’s participants and beneficiaries.”

McClatchy filed customary first-day motions that will allow it to maintain its employee wage and benefit programs, as well as commitments to the other stakeholder groups throughout this process. Go-forward trade creditors and other go-forward vendors are expected to be unaffected by the Chapter 11 process.

McClatchy said it has been in restructuring negotiations with the PBGC and its largest secured creditor to address the future of its pension obligations and capital structure since the fall, and the company included lenders holding 87% of its 9% senior secured notes due 2026 in those discussions last month.

Plan terms

Under the pre-packaged plan of reorganization, existing first-lien notes will be exchanged for new first-lien 10% notes in an amount not more than a principal balance of $218 million. The maturity date will remain the same.

The company’s largest holder of secured debt, including first-lien notes, the loans made under a junior-lien term loan agreement and the 6 7/8% senior secured junior-lien notes due 2031 will receive $81 million of secured debt subordinate to the new first-lien notes in exchange for a portion of its first-lien notes and a commitment to provide the company with $30 million of exit financing. The subordinated debt will accrue payment-in-kind interest of 12.5% or cash-pay interest of 10%, depending on the ratio of leverage to adjusted EBITDA.

Second-lien term loans and third-lien notes will be extinguished in exchange for 97% of the equity ownership of the company, subject to dilution for management incentives and warrants for up to 2.5% of the equity.

Some creditors who are no longer part of McClatchy’s go-forward operations will share in a pool of $3 million or warrants to acquire up to 2.5% of the equity.

Existing equity will be cancelled.

The company will seek court approval to terminate its qualified pension plan and appoint PBGC as the plan’s trustee. McClatchy said it proposes to settle its qualified pension plan debt by paying PBGC $3.3 million each year for 10 years and 3% of the equity ownership.

Mediation requested

While the PBGC has not disputed that the qualified pension satisfies the standards for termination, the company said the PBGC has requested a significantly larger stream of cash payments over 10 years and a larger percentage of equity ownership in settlement of the pension plan termination claims.

In order to enhance the likelihood that the parties can achieve a consensual resolution, McClatchy said it asked the court to approve procedures for appointment of an independent mediator to supervise continuing restructuring negotiations.

Debt details

According to court documents, McClatchy has $1,295,300,000 in assets and $1,637,000,000 in debt.

The company’s largest unsecured creditors are the Pension Benefit Guaranty Corp., based in Washington, D.C., with a $530.35 million claim; Bank of New York Mellon of New York, with a $14.9 million claim; Gannett Supply Corp. of McLean, Va., with a $1.65 million claim; and Wipro Ltd. of East Brunswick, N.J., with a $1.44 million claim.

Since is expects to emerge as a private company, McClatchy said it expects the New York Stock Exchange to begin the delisting process.

The company said it expects total revenues in the fourth quarter to be $183.9 million, down 14% from the fourth quarter of 2018. Adjusted EBITDA is expected to be $33.3 million for the fourth quarter of 2019. For full year 2019, revenues are expected to be $709.5 million, down 12.1% from 2018. Adjusted EBITDA is expected to be $98.2 million for full-year 2019.

The company is advised by Skadden, Arps, Slate, Meagher & Flom LLP, the Groom Law Group and Togut, Segal and Segal as legal advisers and Evercore Group LLC and FTI Consulting, Inc. as financial advisers.

McClatchy is a news and information provider based in Sacramento, Calif. The Chapter 11 case number is 20-10418.

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