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Tribune: 'Where Are We Going Here?'.

(Analysis) When credit rating agencies downgraded Tribune Co.'s debt deeply into junk bond -- with Fitch Ratings this past summer warning of a "real possibility of default" -- none expressed any concern about the Chicago Tribune parent's ability to handle the piddling payment coming due by the end of 2008.

It was just $70 million, something the publisher once might have handled from cash on hand.

The $70 million comes due today -- Monday -- and until the not-so-surprising announcement late Sunday that Tribune has hired a bankruptcy adviser to consider its "restructuring" options, no one saw that as a big deal.

These days, though, everything is a big deal at Tribune. And while the company Sam Zell took private not even one year ago has the financing lined up to handle the payment -- it appears this small amount has given the top executives in Tribune Tower pause.

Why should we pay, when we might be better off reorganizing under bankruptcy protection or some other restructuring, goes the thinking, according to a report in the Trib Monday by Phil Rosenthal and Michael Oneal.

"Sources indicated some within Tribune Co. management believe that a restructuring while there is still cash in the bank and while its newspapers are all still cash-flow positive gives the company the best shot at weathering the current financial storm," they wrote.

Here's the wonky details of how Tribune said it would handle the $70 million payment, in a filing with the Securities and Exchange Commission (SEC) last month.

It seems it has something called a "Delayed Draw Facility" that becomes part of its "Tranche B" credit facility as it draws upon funds. In October, Tribune refinanced an additional $168 million in these Tranche B medium-term bonds, money it said it intended to use to pay the $70 million in medium-term notes coming due Monday.

But Tribune might have seen a somewhat chilling vision of the future when, also in October as credit markets locked up, it sent notice to lenders that it intended to draw $250 million in principal from its revolving credit facility. Fine, but there was just $237 million in it, according to information in the SEC filing.

"The shortfall of approximately $13 million is a result of the fact that Lehman Brothers Commercial Bank, which provides a commitment in the amount of $40 million under the company's $750 million revolving credit facility, declined to participate in the company's $250 million funding request," Tribune said. Lehman Brothers, of course, was one of the first casualties of last fall's financial meltdown, and its commercial bank is in Chapter 11.

Sam Zell and Co. may also be figuring it makes no sense to pay that $70 million now since, by all reports, it appears Tribune will be in technical default of its loan covenants when the debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio is calculated at the end of this fourth quarter.

The loan agreement sets an outer limit of 9 times EBITDA to debt, which is pretty loose. (Consider that GateHouse Media Inc., sometimes considered a poster boy for the newspaper industry's high debt, says its ratio is about 6 times.) Yet it appears that Tribune will be unable to report it is within the covenants.

So Monday's $70 million payment is like the credit card bill appearing in the mail. You're $5,000 in the hole, say. The minimum payment is just $30. But it makes you think, where are we going here? That's no doubt what Sam Zell & Co. are asking themselves this morning in their Michigan Avenue tower.
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Author:Fitzgerald, Mark
Publication:Editor & Publisher
Date:Dec 8, 2008
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