It probably won't hold up the sale to Sam Zell, but three unidentified hedge funds that own 55 percent of a Tribune bond issue are making waves. Well, let's be precise: They're after a quick $400 million. There's no real reason why the funds are entitled to all that money, other than that their people were smart enough to send default notices to Tribune, saying that Zell's plans to sell the Cubs would violate the terms under which the company's debt was sold. So they want to be repaid immediately.
We're talking serious fine print here - as explained by Bloomberg News, Section 10.05 of the bond indenture allows Tribune (the LAT parent) to discontinue or dispose of operations if the sale is "desirable'' for the company and "not disadvantageous'' to bondholders. Getting rid of the Cubs might not be considered "desirable" or "not disadvantageous." The funds also challenge last year's sale of three Tribune TV stations and Zell's plan to increase its debt load. Of course it's a shakedown (I love having this right after ther "Sopranos" post), but they do have a point about higher debt loads adding risk in the event that Tribune goes kablooey. Tribune says the funds don't have the authority to make a default claim.
"If you're a hedge fund, that's how you create value, buying up a large position and then using it to swing your weight,'' said Eric Tutterow, a managing director at Fitch Ratings in Chicago. They'll do what they have to do to squeeze additional value out of the situation.''
It's a tactic bondholders have successfully used before. Blackstone Group LP paid $953 million to redeem debt earlier this year, $127 million more than it first offered, after getting attacked by investors in the $20 billion leveraged buyout of Equity Office Properties Trust. American International Group Inc. is leading an effort to squeeze Tyco International Ltd. for an additional $95 million before approving its breakup plan.
"The normal routine is they negotiate and come to an agreement on the value of their claim and settle for something in the middle,'' said Fitch's Tutterow. "It generally doesn't hold up a transaction.''