By Kevin G. Hall
February 13, 2020
McClatchy was founded more than 162 years ago and has won more than 50 Pulitzer Prizes. McClatchy
McClatchy Co. filed for bankruptcy Thursday, a move that will end family control of America’s second largest local news company and hand it to creditors who have expressed support for independent journalism.
The Chapter 11 filing will allow McClatchy to restructure its debts and, it hopes, shed much of its pension obligations. Under a plan outlined in its filing to a federal bankruptcy court, about 60 percent of its debt would be eliminated as the news organization tries to reposition for a digital future.
The likely new owners, if the court accepts the plan, would be led by hedge fund Chatham Asset Management LLC. They would operate McClatchy as a privately held company. More than 7 million shares of both publicly available and protected family-owned stock would be canceled.
“While this is obviously a sad milestone after 163 years of family control, McClatchy remains a strong operating company and committed to essential local news and information,” said Kevin McClatchy, chairman of the company that has carried his family name since the days of the California Gold Rush. “While we tried hard to avoid this step, there’s no question that the scale of our 75-year-old pension plan – with 10 pensioners for every single active employee – is a reflection of another economic era.”
The filing has no immediate impact on McClatchy’s employees or its 30 newsrooms in 14 states, including the Kansas City Star, the Miami Herald, the Charlotte Observer, the Fort Worth Star-Telegram and the Sacramento Bee. The company said it has secured $50 million in new financing from Encina Business Credit to ensure it can continue to operate while in bankruptcy and hopes to emerge with its balance sheet equipped for the future.
McClatchy executives fought for months to avoid Thursday’s filing; the company pursued multiple regulatory and legislative avenues to address its pension and debt obligations before turning to the bankruptcy process.
Negotiations with creditors intensified late last year. In addition, just weeks ago, Congress — in a last-minute about-face — excluded McClatchy from newspaper pension relief that would have prevented the company from having to choose among paying bond holders, meeting pension requirements or seeking bankruptcy protection.
Also, the documents submitted to the U.S. Bankruptcy Court for the Southern District of New York confirm that the Sacramento-based chain twice last year reached agreement on terms in separate strategic transactions “that would have delevered the business.”
But in both cases, it said, “McClatchy was unable to come to agreeable terms on financing, leaving the transactions unexecutable.” (Industry experts have widely reported that it was Tribune Co., the owner of the Chicago Tribune and other mastheads, that had been in talks about combining with McClatchy.)
“In this important moment for independent local journalism in the public interest, a stronger capital structure will enable McClatchy to continue to pursue our strategy of digital transformation and continue to produce strong local journalism essential to the communities we serve,” said Craig Forman, McClatchy’s chief executive officer.
McClatchy’s bankruptcy underscores the grim reality facing the local news industry amid profound transformation in its business and revenue model. More than 2,000 newspapers ceased production in the last 15 years, according to a recent think-tank report from the Brookings Institution.
Not only has the business model changed for newspapers, legacy companies carry large pension obligations that eat into cash flow and profits. McClatchy’s qualified pension covers more than 24,500 current and future retirees — many retired blue-collar workers who manned printing presses or loaded newspapers onto delivery trucks — supported by fewer than 2,800 active employees.
Between 2006 and 2018, McClatchy’s advertising revenue fell by 80 percent and daily print circulation fell by 58.6 percent. While the company has worked over three years to achieve a more sustainable 50-50 split of print vs. digital advertising, those gains couldn’t outpace the approaching pension and debt obligations.
In filing for Chapter 11, McClatchy is following a familiar path for legacy newspaper companies; most other major newspaper companies, including Tribune, Lee Co. and New Media/Gatehouse, which recently acquired Gannett, preceded McClatchy on this bankruptcy restructuring path.
McClatchy’s new owners will face the same “fundamental headwinds” that have driven mergers and closures, said Anthony Campagna, director of research for ISS EVA, a provider of analytics and market intelligence to investors.
“There’s probably economies of scale that have to happen in an era where much less people are reading print media,” he said.
Chatham, in a statement shared early Thursday, expressed its support for the mission of local journalism in the public interest.
“As a supportive investor in McClatchy since 2009, Chatham is committed to preserving independent journalism and newsroom jobs. We look forward to working with the company in the best interests of all stakeholders,” Chatham said.
AREAS OF AGREEMENT
McClatchy and its creditors fell short of a fully pre-arranged bankruptcy, leaving open the possibility of a legal battle that could drag out. But the company reached substantial agreement on major issues.
Among them was a debt-for-equity swap that leaves its main bondholders led by Chatham with control of the company, meaning the end of the McClatchy family’s control after 163 years.
Chatham is a New Jersey-based hedge fund that last year reported more than $4.4 billion in assets under management on behalf of 14 clients. Hedge funds pool investment from wealthy individuals and big institutional investors, and Chatham’s specialties include investing in companies facing debt distress.
Other bondholders named in the filing who stand to get an ownership stake in the new company are Leon G. Cooperman, a prominent billionaire investor and CEO of Omega Advisors, and New York-based Brigade Capital Management, another hedge fund specializing in companies with high debt and distressed balance sheets.
McClatchy had outstanding debt of more than $703 million at the time of filing, and its unfunded pension obligations — the proximate cause of the filing -- were estimated to be valued above $805 million last July. Since 2011, the company had made more than $275 million in pension payments in excess of what was required. It has used the sale of its buildings and other assets to pay creditors and pension obligations.
Under a deal with creditors, holders of McClatchy’s most protected debt — known as “first lien” debt — will swap it for new debt worth $218 million, with the same maturity date but a 10 percent annual interest rate, an increase from the current 9 percent rate on similar securities. Holders of a larger pool of second and third-level McClatchy debt will swap it out for a 97 percent equity stake in what will become a privately held news organization.
McClatchy has asked the court to appoint a mediator to supervise remaining negotiations with creditors to speed a mutually beneficial resolution.
McClatchy’s restructuring proposal, submitted to the court, also would see the Pension Benefit Guaranty Corporation take over administration of the qualified pension plan. As part of that proposal, McClatchy committed to making payments of $3.3 million annually to the federal entity over the next 10 years. The agency would get up to 3 percent of the new company emerging from bankruptcy. The PBGC did not agree in advance to that proposal.
The inflection point for McClatchy’s bankruptcy was the failure to get pension relief from Congress.
A pension solution appeared hours away from a legislative agreement late last year, before falling victim to partisan politics.
Congress passed the Secure Act in December, a retirement-security package that became a legislative vehicle to which a range of tax matters could be affixed, some of which involved technical corrections to inadvertent errors in President Trump’s tax overhaul signed into law in December 2017.
During the negotiations over the scope of what would be attached to Secure Act legislation, McClatchy and the San Diego Union Tribune, among others, sought to be added to already existing language in the bill designed to give struggling community newspapers more time to address their pension commitments.
The language, which remained in the version of the Secure Act passed into law, gave these smaller papers 30 years to fully catch up on their current pension obligations, relieving them of the burden of choosing between creditors and bankruptcy.
McClatchy was late to the game and one participant in the process described it as an attempted “Hail Mary.”
The company worked through several lawmakers on both sides of the aisle from communities where McClatchy owned newspapers and with congressional leadership.
It sought what was ultimately granted to about a dozen companies: 30 years to meet its pension funding requirements instead of the current seven years. For that help, it would pay a higher interest rate of 8 percent on its delayed contributions.
Like much in Washington today, partisan politics were on full display.
The pension-relief plan quickly faced opposition from Utah Republican Sen. Mike Lee, who publicly opposed the plan’s extension of pension payments. The longer payback window, he argued in a Nov. 8 statement, amounted to a “special interest bailout to these newspapers.” He added that they’d unlikely ever make up the shortfall.
Kent A. Mason, a partner in the law firm of Davis & Harman, which specializes in retirement policy issues, worked on behalf of McClatchy in the negotiations. The proposal was designed to prevent, not cause, a bailout by allowing the company to weather temporary difficulties, he said.
Instead, by filing bankruptcy, McClatchy was forced to seek help from the PBGC.
“That is an actual bailout that could have been prevented by funding relief, which simply gives a company more time to pay its own obligations without a bailout,” Mason said.
House Speaker Nancy Pelosi, D-Calif., and Senate Minority Leader Charles Schumer, D-N.Y., actively worked on the issue. Multiple sources said Senate Majority Leader Mitch McConnell didn’t oppose their effort; a McClatchy masthead, the Lexington Herald Leader, is in his home state of Kentucky.
Several people involved in the negotiations said they believed they’d struck a deal on a Sunday night and the matter was dealt with.
Then, it wasn’t. Something changed in the wee hours of morning.
“There were at least parameters of a deal,” said one person close to the negotiations, who described talks as “basically a hostage drama.”
How did it all fall apart even as three of the top four congressional leaders -- called the Four Corners -- were expressly behind the plan?
“I myself would like to know,” said Rep. Doris Matsui, D-Calif., a reader of the Fresno Bee since childhood who worked with House leaders to find a solution. “We felt like we made a lot of progress. We thought it was ready to go. It didn’t happen.”
Accounts vary from numerous congressional staffers, industry groups and lawmakers themselves over just what was at play, what was offered if anything as trade bait and how close they were to a deal.
In conversations they conditioned on anonymity to speak freely about an ongoing negotiation, the one constant was bipartisan rancor.
The Secure Act finally passed Congress on Dec. 19, one day after House Democrats passed articles of impeachment against President Trump. The atmosphere for bipartisanship wasn’t exactly palpable.
The Secure Act passed without the language that would have helped McClatchy and the San Diego Tribune, although it did include original language that provided relief to the Seattle Times, Minneapolis Star Tribune and Tampa Bay Times, among others.
“We were delighted Congress provided pension relief to roughly a dozen community newspapers but at the same time completely disheartened that the relief was not extended to McClatchy and other newspapers that clearly match the spirit of the provision,” said David Chavern, president and CEO of the News Media Alliance, an industry trade association.
Pension relief wasn’t the only important thing that didn’t get done for their home districts. Leaders could not agree on a fix for a drafting error in the Trump tax revamp that would have helped retailers, restaurants and producers of energy efficient lighting. This fix appeared to be a tradeoff for pension relief.
Republicans were seeking the fix on the “Qualified Improvement Program,” or QIP, designed to give some businesses the ability to write off more on taxes and over a shorter time period. But House Democrats, unhappy with having no voice in a tax revamp done when the GOP led both chambers, demanded $100 billion worth of refundable tax credits or child tax credits in exchange.
This sort of horse trading in legislation is common, but the Democrats’ number, said some involved in talks, was so high it signaled disinterest to Republicans.
A QIP fix was in discussion the night that McClatchy’s inclusion in the pension relief came undone, even as other obstacles in the negotiation were cleared.
The Trump administration did not appear opposed to pension relief efforts.
A White House official acknowledged that what appeared set on Sunday night changed, and that when talks resumed “what was on offer from House Democrats and Senate Republicans to us was what ultimately agreed to and enacted.”
Whatever changed at the last minute happened at the level of talks between top leaders in both parties. And representatives for their offices did not respond to repeated requests for comment.
Since its shares will no longer be traded on the NYSE American stock exchange under the ticker symbol MNI, McClatchy expects to begin the process of being delisted and cancelling its existing equity.
The McClatchy family was forced to give up its protected Class B stock that had served as a buffer against hostile investor takeovers. That was not without irony since McClatchy’s leap into the ranks of the largest publishers came after an investor-led revolt forced the Knight Ridder chain to sell itself.
McClatchy was the proverbial dog that caught the car, buying its larger competitor Knight Ridder in March 2006 for $4.5 billion in cash and stock. It also assumed $2 billion of Knight Ridder debt.
Just a year earlier, McClatchy stock topped $740 a share. But, in 2007, the first cracks appeared in what would become a snowballing global financial crisis. The subsequent Great Recession, fueled by a collapse in housing prices, took a huge toll on McClatchy and its competitors alike. Advertising dollars shrunk. Emerging internet companies such as Craigslist and Zillow lured away classified ad revenue.
McClatchy’s stock fell to 35 cents a share last Nov. 27 amid bankruptcy fears. It bounced back above $1.50 in mid-January on news that talks with the Pension Benefit Guaranty Corporation had entered a quiet period, signaling a potential solution.
The stock traded at 75 cents a share at Wednesday’s close.