Phila. Newspapers seeks new date for auction

Philadelphia Newspapers L.L.C.'s reorganization plan might collapse under the growing weight of bankruptcy costs if the case is not resolved by May, the company's attorney said yesterday.

To avoid that, the company, according to attorney Lawrence G. McMichael, plans to ask a federal bankruptcy judge to set a new date for the media firm's auction - even as all sides await a ruling on a key issue by the U.S. Court of Appeals for the Third Circuit. The appeals court is deciding whether the company's senior lenders can use their debt, as opposed to cash, when they bid for the company at auction.

Senior lenders own the largest amounts of the company's debt. The group includes Angelo, Gordon & Co. and CIT Group.

The auction date being sought, which McMichael did not specify, would be soon enough to permit the company, which owns The Inquirer, the Philadelphia Daily News, and Philly.com, to come out of bankruptcy by May. McMichael said it was anticipated that the Third Circuit would have ruled by the time of the auction. If it has not, the company would reconsider the timing of the sale, he said.

In a letter to Chief Bankruptcy Judge Stephen Raslavich that seeks a hearing on the matter, McMichael indicated that the delay in a ruling from the Third Circuit was becoming "a threat to the debtor's ability to reorganize." The reason, he said in an interview, was the bankruptcy costs.

Those costs include legal fees and payments to financial advisers hired by both the company and its lenders. The costs totaled $26.2 million in fiscal year 2009.

"The monthly accrual of those fees and costs has been running somewhere north of $2 million," McMichael said. "At that burn rate, the company will eventually run out of cash."

Absent the bankruptcy costs, McMichael said, the company has enough revenue to continue to pay its operating expenses.

McMichael said he expected Raslavich would hold a hearing on the matter next week.

Andrew Kassner, a lawyer for Citizens Bank, the agent for the senior lenders, said he had not seen McMichael's letter to Raslavich and so could not comment. Fred S. Hodara, lead attorney for the senior lenders, could not be reached for comment.

The company filed for bankruptcy last February. Its reorganization plan would give its senior lenders about $67 million in cash and property to settle about $318 million in debt.

To determine if that represents a fair price for the debt, the company will be put up for auction to the highest bidder. The initial bidder in the process is a new entity made up of Bruce Toll, vice chairman of Toll Bros. Inc.; the carpenters' union pension fund; and the philanthropist David Haas. Toll and the pension fund were involved in a partnership that bought the company in 2006.

An auction had been initially scheduled for November, with the company anticipating that it would come out of bankruptcy by the end of 2009. The dispute over whether the lenders could bid the face value of their debt foiled that schedule.