The Zell of the brawl

The scuffle between bondholders and US newspaper publisher, Tribune, is unlikely to set a precedent for a larger war among America's troubled leveraged buyouts.

Some of the Los Angeles Times' parent’s creditors are fighting its bankruptcy plan, arguing that Sam Zell’s buyout should never have been allowed in the first place. Lenders to other companies that levered up may want to make similar claims. But Tribune’s swift demise suggests it was an especially egregious case.

Bondholders representing more than 18% of the debt are claiming “fraudulent conveyance”, legal jargon meaning that the $12 billion deal for the group, which also publishes the Chicago Tribune and owned the Cubs baseball team, unfairly paid out the equity holders of Tribune, while subordinating lenders to the company before it geared up like a drunken sailor. Aggrieved creditors often make such fraudulent conveyance claims when LBOs go bust. They can win in two ways.

First, they can show the lenders closed the deal despite knowing it would lead the company to the wrecker's ball. That usually only works if the company goes bankrupt within a year - a distinction that eminently qualifies Tribune. Other troubled LBOs do not. Among some of the more wobbly deals of the same era, radio company Clear Channel’s deal closed in May 2008.

Casino group Harrah’s Entertainment went private in January 2008. Both firms are struggling mightily - but so far have avoided filing for Chapter 11 protection. Tribune's bondholders could also win if the company can be proven to have been effectively insolvent at the time of the deal, or if the total enterprise value of the company amounted to less than the debt used to buy it.

This is tricky, since values can be subjective, and do change over time. Still Zell’s deal, in the clearer light of the post-crisis age, looks more aggressive than others. Tribune was saddled with debt that gave an enterprise value of more than 11 times ebitda. Rivals, like the New York Times Co., had values closer to 7 times. Tribune had a debt to equity ratio of 24-to-1. Clear Channel’s LBO was about 7-to-1.

Unsecured creditors in other troubled LBOs may try to make similar claims. But Tribune’s swift descent into bankruptcy makes the case particularly strong. A victory for the bondholders might embolden copycat lawsuits — but equally it could convince buyout firms to keep their zombie companies out of bankruptcy a little while longer.