Reporting from Chicago — A large group of senior creditors in the Tribune Co. bankruptcy case is attacking a settlement proposed last week by the Chicago-based media conglomerate, insisting that Tribune Chairman Sam Zell and the company's board of directors share in the cost of any resolution of the 16-month-old case.
The group also decried a proposal in the settlement agreement that calls for as much as 7.5% of the company's equity to be set aside for management compensation programs, diluting the value of other new shareholders in a reorganized company.
The creditor group, which said it represents $3.6 billion, or 42%, of the most senior level of Tribune debt, is composed largely of hedge funds and led by distressed-debt investor Oaktree Capital Management.
The group filed court papers Monday calling the settlement proposal "internally inconsistent and unfair" and saying that it offered Zell and others immunity from legal claims arising from the company's failed 2007 leveraged buyout without asking for anything in return.
"This is a settlement made possible with 'other people's money,' " the group's filing said. It vowed that a reorganization plan based on the settlement would be "dead on arrival."
Tribune, which owns the Los Angeles Times, is expected to file such a plan in advance of a hearing Tuesday in front of the U.S. Bankruptcy Court in Delaware.
The company would not comment on the filing.
Monday's salvo signals that Tribune's hoped-for "consensual resolution" to its Chapter 11 case has yet to materialize. Despite months of trying, the company has yet to persuade a large chunk of its most powerful creditor constituency that it is in their best interest to settle with junior creditors.
Although a former Oaktree ally, distressed-debt fund Angelo, Gordon & Co., signed on to the Tribune agreement, it left behind a large group of other hedge funds that oppose carving as much as $451.4 million out of the company's estimated $6.1 billion in value to pay off junior creditors with more than $1.2 billion in claims.
At issue in the case is a claim by various groups of junior creditors that Zell's $8.2-billion leveraged buyout was a prime example of "fraudulent conveyance," meaning it left the company insolvent from Day One.
If proved, such a claim would allow the Bankruptcy Court to invalidate the $8.6 billion in claims held by senior lenders to the deal, led by JPMorgan Chase & Co., and by those who subsequently bought pieces of that debt on the open market, including Oaktree and Angelo, Gordon.
Junior creditors had been pressing these claims to gain leverage against the senior group in settlement negotiations.
The agreement proposed by Tribune on Thursday was approved by JPMorgan (as agent for the original lenders), Angelo, Gordon and Centerbridge Capital, the largest of the junior creditors. In return for giving the Centerbridge group and other junior creditors a significant portion of the company's value, the senior creditors and Zell would receive indemnity from any claims arising from the leveraged buyout.
But the Oaktree group balked at the deal and in Monday's filing drew a line between investors who bought the debt in the open market and lenders like JPMorgan, who collected more than $2 billion in interest payments and fees before the heavy debt burden from the deal helped push Tribune into bankruptcy.
The settlement agreement, the filing said, proposes to indemnify Zell, the board, JPMorgan and others, even though Zell and the board are being asked to pay nothing into the settlement and JPMorgan has already been paid handsomely in fees and interest as a result of the deal.