• by Erik Sass  @eriksass1, September 29, 2010

Just when it seemed like the wheels were about to fall off Tribune's bankruptcy reorganization, the company announced it has finally reached a settlement with two of the biggest creditors: Oaktree Capital Management and Angelo, Gordon & Co.

The news holds out promise that further settlements with other senior creditors and various aggrieved bondholders may also be in the offing. The agreement was reached under the supervision of a court-appointed mediator and approved by a special bankruptcy committee drawn from Tribune's board of directors. But it still requires approval from the Delaware bankruptcy court.

Don Liebentritt, Tribune's chief restructuring officer, stated: "The plan addresses two primary issues that are fundamental to a successful reorganization of Tribune."

First, it allows Tribune to exit Chapter 11 bankruptcy protection by distributing the equity of the reorganized company to the hedge fund investors named above, effectively settling claims surrounding "Step 1" of the company's ill-fated going-private transaction in 2007. As part of the agreement, senior bondholders (unsecured creditors) will get $300 million, equal to 23% of their original claim. However, it also allows their claims regarding the contested "Step 2" transaction to move forward, by placing these in a "litigation trust."

The litigation trust is a legal device created to separate claims by various parties, allowing the uncontested parts of the bankruptcy reorganization to proceed while leaving others unresolved pending further legal wrangling. The "Step 2" transaction claims amount to $2.2 billion in debt assumed by Tribune as part of the multi-step private transaction engineered by billionaire Sam Zell.

Further litigation regarding these claims must be initiated by an impartial "litigation trustee." According to Tribune, the unsecured creditors may recover up to 50% of their claim in cash.

The agreement represents a compromise taking into account the demands of unsecured creditors, who got an earlier bankruptcy reorganization plan scrapped by arguing that the original buyout deal was doomed to insolvency from the beginning and therefore illegitimate. In August they received more ammunition in the form of a report by independent examiner Kenneth Klee, who said certain information suggested members of the company's former management may have known the deal was not financially viable, making it a "fraudulent conveyance."

As a result, he warned that it was "somewhat likely that a court would conclude that the Step Two Transactions [when the company assumed $3.6 billion in debt] constituted intentional fraudulent transfers and fraudulently incurred obligation." Senior lenders, including JP Morgan Chase, subsequently withdrew their support for the original bankruptcy reorganization plan proposed by Tribune.

The new agreement comes just two weeks after one of the unsecured creditors, Aurelius Capital Management, demanded that Tribune's entire management be replaced by a court-appointed trustee because of their alleged dishonest and fraudulent actions. That action threatened to derail the already troubled bankruptcy process.