Tribune Company, which owns the Los Angeles Times, has been in bankruptcy for...well, years. And according to recent reports, it won't be coming out of Chapter 11 any time soon. So what's the holdup?
Basically, it's two very large lenders versus an incredibly tenacious hedge fund. On one side, we have Oaktree Capital Management and JPMorgan Chase. Oaktree invests heavily in "distressed debt" — it has close to $30 billion of it's more than $80 billion under management tied up in defaulted or defaulting securities. According to Bloomberg, Oaktree along with Tribune's other "senior creditors" hold around $3.4 billion on a total of $8 billion that Sam Zell borrowed to buy Tribune in 2007.
For the record, Zell's buyout took Tribune's total debt to a staggering $13 billion.
When Tribune finally exits bankruptcy, Oaktree will exchange its debt for equity — an ownership stake — in the new company. To do this, they want Tribune's bondholders to effectively take a $500 million payoff, then fight it out in court over whatever is left of the "bad" company while a "good" company can emerge from Chapter 11.
That's the plan that the "senior creditors," as they're called, have proposed. But the "junior creditors" — guided by Aurelius Capital Management, an aggressive, New York hedge fund — aren't interested in taking the deal. They want to fight over every penny in court. This is from HFMWeek:
[Aurelius]...is leading a group of dissident bondholders who claim that the lenders that financed a recent buy-out that saddled Tribune Co with over $12 [billion] in debts, are escaping legal liability too easily.
“We at Aurelius believe in the rule of law,” [Aurelius founder Mark] Brodsky reportedly wrote in a letter to Tribune’s creditors. “We believe wrongdoers should be held accountable rather than rewarded; and we have decided to make a stand.”
The fund has a somewhat fearsome reputation in the industry, with one professional at a restructuring practice reportedly stating: “Aurelius is like the Terminator – they just keep coming and coming and coming.”
Oaktree is hardly going to back down, however. Its Chairman, Howard Marks, is something of a legend is (this is also from Bloomberg):
Marks divides his time between London, Los Angeles and New York, sending his investing missives to Oaktree’s 1,800 clients worldwide. He keeps in shape with calisthenics and a yoga-inspired stretching regimen. After finding the vegan diet prescribed by his wife, Nancy, to be too rigid to follow while traveling, he’s sticking with the protein, vegetables and beans suggested by his son, Andrew, who works at a hedge fund in New York. His daughter, Jane, works in New York too, in the art world.
So it all boils down to the Great Big Hedge Fund versus the Somewhat Smaller Hedge Fund. The Tribune bankruptcy, given the sheer volume of the distressed debt, is right in Aurelius' wheelhouse, however. The hedge fund's playbook is to force its Chapter 11 opponents to endure protracted legal combat. Unlike Oaktree, which would wind up owning a piece of the post-bankruptcy Tribune and presumably be able to dictate the future management of the company (making it more of a private-equity player in this case), Aurelius is in it for the money.
And given the fairly poor prospects for some of Tribune's core businesses — newspapers — Aurelius may not be willing to settle for anything less than what it believes it deserves.