Tribune Bankruptcy Restructuring: Company Wants To Stay Together

Last month, I wrote about how the Tribune Company filed for Chapter 11 bankruptcy protection.

Now, as the company starts to plan its reorganization, the complication is that the Tribune wants to retain all its assets, while keeping its unusual corporate structure (S-corp owned by an ESOP).

The Tribune wants to keep its media assets (Chicago Tribune, Los Angeles Times, WGN TV, etc.) because executives feel they are worth more together, than chopped up and sold at distressed prices. The Tribune does, however, still plan to sell the Chicago Cubs and Wrigley Field.

At the same time, the Tribune wants to stay an S-corp owned by its employees (ESOP). Unlike a regular C corporation, an S-corp allows all income to be passed through to the owners. Since the owner (ESOP) is organized as a tax-exempt qualified retirement plan, this allows the Tribune to avoid all taxes.

Retaining the ability to avoid income tax is viewed as an important part of any recovery.

Keeping the S-corp structure complicates restructuring their $13 billion debt load because Tribune creditors such as JPMorgan Chase, Citigroup, and Bank of America can't be given equity in exchange for debt reductions.

An S-corp is limited to 100 owners - who must be individuals, and not other corporations. (The ESOP, representing thousands of employees, counts as one individual owner).

A possible solution is to offer the creditors some type of debt instrument that does not pay interest, but has a value pegged to the stock, so that the creditors would participate in any upside.

At least one bankruptcy expert, however, thinks that the lenders would be too risk averse to accept a security like this because the IRS will probably challenge it.

The one thing in the Tribune's favor is time to work out this situation because the creditors do not have right to demand interest payments (Due to this deal being done during the era of loose lending practices, and banks fighting over it).

All the Tribune needs is enough funds to continue operations. This is covered because their newspapers and TV stations should still generate $500 million dollars. They also got a $50 million letter of credit and a $300 million loan against receivables from Barclays.