Judge rules for DN/Inky lenders in credit-buy bid

By BOB WARNER
Philadelphia Daily News

warnerb@phillynews.com 215-854-5885

A federal bankruptcy judge dealt a major blow yesterday to publisher Brian P. Tierney's effort to keep control of the Inquirer and Daily News.

Chief U.S. Bankruptcy Judge Stephen Raslavich ruled that the senior lenders holding more than $300 million in secured debt can use those IOUs to submit a bid for the newspaper company at auction.

And if the lenders were to outbid a group of local investors put together by Tierney, the local investors would not be entitled to a proposed $1.5 million "breakup fee," Raslavich ruled.

The decision appears to put a group of hedge funds and other financial institutions, led by Angelo, Gordon & Co. of New York City, in a better position to take ownership of the newspapers and their Web site, Philly.com, sometime late this year or early in 2010.

Philadelphia Newspapers LLC, the current management group put together by Tierney in mid-2006, is expected to proceed with its plans for a public auction, originally scheduled for mid-October, but now pushed back at least until November.

Holding secured debt worth an estimated $318 million, the senior lenders, led by Angelo, Gordon, would be the most likely auction winners, unless a buyer materialized with pockets deep enough to outbid them.

The newspaper company could drop its auction plans or appeal Raslavich's ruling. But either move would allow the senior lenders to unveil and begin promoting their own reorganization proposal.

Jay Devine, a spokesman for the newspapers, issued a statement on the company's behalf, expressing disappointment with the judge's ruling.

"We're disappointed because we know how terrible it will be for these papers, our employees and our community if these out-of-town hedge funds take over," said the statement. "In contrast, the community-based investors want to protect and nurture these treasures for the long haul."

A statement distributed to employees from Scott K. Baker, general counsel for the newspapers, said that the auction process would proceed, but he suggested that many lenders might balk at taking over the newspapers.

"In order to make a credit bid, a majority of the senior lenders must vote in favor of doing so," Baker said. "Most importantly, as part of that bid, they will have to provide the company with tens of millions of dollars of new cash in order to pay the various costs of exiting from bankruptcy, to provide the company with ongoing working capital cash and to secure letters of credit for workers' compensation and other similar needs."

Devine said: "Now the banks and the hedge funds have to decide which ones are interested in using their debt to buy the papers and which ones will be interested in the cash offer that we've made."

Tierney had convinced two of his original investors, businessman Bruce Toll and the Carpenters Union pension fund, and a new investor, David Haas, to offer a combined $52 million in cash and credit for ownership of the company.

That was the basis of a reorganization plan that would give secured creditors about $36 million in cash and ownership of the Inquirer/Daily News building at Broad and Callowhill streets. The package was valued at $66 million - about 21 cents on the dollar for the $318 million in debt owned to secured creditors.

The newspapers' attorney, Lawrence G. McMichael, had argued that federal bankruptcy law permitted the newspapers to prohibit credit bidding in the proposed auction.

The influx of new, real cash from the proposed group of investors would leave the newspapers with a better chance of financial success after the bankruptcy reorganization, McMichael said.

But attorneys for the newspapers' major lenders described the proposal as an insiders' effort to keep control of the newspapers, and Raslavich essentially agreed.

"The Lenders argue . . . that the Debtors' tactics are in furtherance of a strategy which is designed not to produce the highest and best offer for the Debtors' assets, but which is instead designed to promote . . . the continuation of current ownership and management," the judge wrote.

"The Court is constrained to observe that the Debtors have offered little that points to a different conclusion."

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