Creditors Want Control of Philly Newspapers

The Philadelphia Inquirer In a new twist on the financial woes of American newspapers, creditors are actively seeking control of Philadelphia Newspapers L.L.C., on the grounds that their financial interests are not being protected by the publisher of The Philadelphia Inquirer and Philadelphia Daily News, which filed for Chapter 11 bankruptcy protection earlier this year.

Until now, most lenders have agreed to leave distressed newspaper companies under their existing management, while renegotiating the terms of lending agreements.

According to The Philadelphia Inquirer, which first reported the news, the senior lenders -- including Citizens Bank -- are owed about $300 million by Philadelphia Newspapers L.L.C., a subsidiary of Philadelphia Media Holdings, the company formed by Philadelphia ad mogul Brian Tierney to buy the newspapers in 2006.

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Formerly owned by Knight-Ridder, the Philly papers were among a dozen less-valuable properties auctioned off by McClatchy after it acquired Knight-Ridder for $4.5 billion in March 2006. Tierney paid about $515 million for the newspapers -- but the rapid decline of print revenues, combined with the economic downturn, have derailed his plan for repaying the debt.

The company defaulted on its debt in June 2008, then again in October, and entered bankruptcy this February.

Although Tierney has put a positive spin on the Chapter 11 filing, saying the company's current operations are breaking even, the lenders are asking the U.S. Bankruptcy Court in Philadelphia to impose "independent oversight" on the company as a condition of further funding.

Specifically, they want the court to elevate Tierney's advisor to an official position, "chief restructuring officer," with real executive power. They also want the court to appoint independent "directors" or "managers" overseeing the company's operations. Previously, Citizens criticized Tierney's uncontested control of the company, noting that he manages the business without a board of directors.

The demand for more oversight comes shortly before a hearing, scheduled for May, to decide whether the company can use cash to pay for continuing operations. Philadelphia Newspapers L.L.C. was previously operating under a financial arrangement called "debtor-in-possession" financing, with funds from a group of private lenders. As the wording suggests, this arrangement left operations under the control of Philadelphia Newspapers.

At the time this arrangement was announced, Stu Bykofsky, a columnist for the Inquirer as well as a spokesman for the Newspaper Guild, Local 10, warned that "the alternative to Brian Tierney is far, far worse. If a new CEO were thrust upon us, who knows what he'd want to do. ... It could be a scorched-earth policy."

Seeking to rally support from employees, Philadelphia Newspaper executives have warned that something similar may happen if the bankruptcy court creates new, independent management positions within the company. Among other things, they warned that Citizens may close the Daily News -- an assertion that Citizens denies.

Several other big newspaper publishers have declared bankruptcy in recent months.

The Tribune Co. filed for Chapter 11 bankruptcy in December, unable to make scheduled payments on an enormous debt of about $11 billion. The Journal Register Co. technically defaulted on its debt of about $700 million last July and was forced to declare bankruptcy in February when temporary agreements with lenders expired.

In its filing, Journal Register asked the U.S. Bankruptcy Court in Manhattan to allow it to cancel its stock and hand the company over to its creditors. After technically defaulting on its debt last year, the company has been forced to close scores of small-town weekly newspapers throughout Connecticut, Pennsylvania, upstate New York and Michigan.

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