Bankruptcy may be next at some papers
As awful as the prospect sounds, it actually could be a good thing for the newspapers, because a Chapter 11 bankruptcy filing enables a struggling company to restructure its debt, streamline its business and potentially put itself on a sounder footing for the future.
Not all Chapter 11 filings are successful. In some cases they lead to the eventual liquidation of the business through Chapter 7 or some other means.
And any bankruptcy action almost certainly would wipe out the equity of such investors as the owners of Philadelphia Media Holdings, the Minneapolis Star Tribune and Sam Zell and his fellow employees at Tribune Co. Fears of imminent bankruptcy already have driven public companies like GateHouse to 33 cents a share and Journal Register Co. to 1 cent, so neither has much further to go.
Bad as the loss of their $182 million investment might be for the equity shareholders of Philly Media, Chapter 11 could give management a lot of leverage in rescuing the business from outright collapse. The Philly example discused here generally applies to any financially stressed publisher owing more money than its sales- and profit-challenged business can afford to repay.
Under the auspices of a bankruptcy court, Chapter 11 gives a company the right to walk away from unnecessary leases on real estate, equipment and vehicles. It also lets a company renegotiate bills owed to creditors, enabling debts to be settled for cents on the dollar. Wages, benefits and other obligations to employees usually are unaffected by a bankruptcy filing.
Bankruptcy protection would give Philly Media’s creditors an incentive to renegotiate the $380 million loan the company’s weak profits no longer can service. Because the company was unable to make its scheduled debt payment over the summer, penalties nearly doubled the interest rate on its loan to 9.5%, according to Standard and Poor’s, the bond-rating service.
A renegotiated deal with Philly’s lender, the Royal Bank of Scotland, might trim the interest rate, lengthen the maturity or get the bank to write off a certain portion of the borrowing. Bond traders already have discounted the debt of companies like Philly Media, Tribune, Star Tribune and others to 50 cents on the dollar – or less. So, a reduction in principle may not be as far-fetched as it sounds.
Last but not least, Chapter 11 typically gives a company like Philly Media the ability to terminate the restrictive and anachronistic labor contracts that stand in the way of the efficient operation of a company that is literally fighting for its life.
Before anyone thinks I am anti-union, remember that my father was a union man, my mother was a union woman and I was a proud member for many years of the Chicago Newspaper Guild. But these are perilous times, and unions, instead of protecting antiquated prerogatives, need to act constructively to preserve as many jobs for their members as possible.
While Chapter 11 provides a respite for a troubled company, it is only a respite. At some point, a business either has to emerge from bankruptcy as a going concern or go down the tubes. In the latter event, everyone loses.