Phila. Newspapers, top creditors agree on several points

After months of squabbling on multiple fronts, Philadelphia Newspapers L.L.C. and its major creditors announced a series of accords yesterday that should quicken the pace of the company's bankruptcy case.

The settlements, however, do not mean the end to conflicts. At the conclusion of a hearing in U.S. Bankruptcy Court here, the company and the creditors disagreed strenuously on whether the lenders could use the debt they were owed in a bid to buy the company.

The outcome of that dispute could determine who will ultimately own the media firm.

Ownership clearly is at stake, as Fred Hodara, a lawyer for the senior lenders, announced that his clients intend to seek control of the company that owns The Inquirer, the Philadelphia Daily News, and Philly.com. The senior lenders include Angelo, Gordon & Co.; CIT Group; Eaton Vance Management; and Citizens Bank.

Hodara pressed his point by telling Chief Bankruptcy Judge Stephen Raslavich that Robert J. Hall, former publisher of the papers when the company was known as Philadelphia Newspapers Inc., was serving as adviser to the senior lenders. Hall, who was in the courtroom, would serve as a member of the management team if the lenders get control of the company, Hodara said.

In the meantime, the two sides reached some accords after a series of mediation sessions during the last two weeks. Those agreements included:

Citizens Bank, one of the company's senior lenders, will provide $15 million interim financial assistance to the company, known as debtor-in-possession financing. The company had been seeking its own financing through Republic First Bank. The agreement eliminated a loan clause giving the lenders approval rights over any reorganization plan. It also ensures no other creditor will move ahead of the senior lenders as it regards repayment of debts.

The period of time Philadelphia Newspapers has to exclusively pursue its plan of reorganization, without a competing plan presented by the creditors, was extended until Nov. 2. The extension will be the last sought by the newspaper company and it can be canceled if the company fails to follow through on its plans to place the company up for auction.

Senior lenders can negotiate contracts with any of the company's unions, so long as the unions approach them first. Negotiations also are allowed if and when the lenders officially bid on the company.

A third party, possibly the U.S. Trustee's Office, will serve as an independent monitor to ensure the company's auction is open and fair.

The investigation into an unauthorized taping of a meeting between senior lenders and company officials is suspended until Jan. 2. The company had been pressing for a more aggressive investigation of the taping, which was done by an official of CIT Group, a senior lender, at a meeting with company officials months ago.

The agreements follow last week's release of the company's $92 million reorganization plan, which calls for senior creditors to receive $66.6 million in cash and property to settle about $300 million in debt. The company will also provide up to $25 million to settle the costs of exiting bankruptcy.

The plan, which still requires court approval, also declares the company's intention to put itself up for bid. This is intended to prove the plan rightly measures the market value of Philadelphia Newspapers.

Hodara said yesterday that the senior lenders intend to bid on the company. He did not discuss the specifics of a bid.

In its proposed bid procedures issued yesterday, the company said lenders should not be permitted to "credit bid," meaning to use the debt owed them to bid on the property. If permitted to credit-bid, the senior lenders would likely trump any other bidder.

Rather than credit-bid, the lenders should be required to use cash upfront, as any other bidder would be required, said Lawrence G. McMichael, a lawyer for Philadelphia Newspapers. Brian P. Tierney, chief executive officer of the company, raised new investments to partly finance the newspapers' reorganization plan. Investments came from the Carpenters Union, real estate executive Bruce E. Toll, and a wealthy but anonymous contributor.

If lenders are able to use "credit bids," it would have a "chilling effect" on other bidders, McMichael said, and the company might not receive its fair value.

Senior lenders, however, intend to argue the bankruptcy code not only allows but requires that they be permitted to credit-bid, Hodara said.

Raslavich, in praising both sides for their recent accommodations, pointed to the issue of credit bids as the next "significant issue in the broad scheme of things."

McMichael said it was "of critical importance to both sides."

That issue is set for a court hearing Sept. 15.