Bankruptcy battle: Who will own the Daily News and Inquirer?

An imminent battle for control of the Daily News and Inquirer is shaping up in U.S. Bankruptcy Court.

Lawyers for the Philadelphia newspapers and their biggest lenders reached agreement yesterday on $15 million in temporary financing and relatively minor issues that had bogged down the Chapter 11 bankruptcy case in recent weeks.

But there was no whiff of major compromise between two groups vying to run the two daily newspapers when they emerge from bankruptcy, perhaps by the end of the year.

On one side is the current management team, led by CEO Brian P. Tierney, and backed by several local investors who are willing to put up about $52 million in cash and letters of credit, in exchange for ownership of the newspaper company, which also owns Philly.com.

On the other side is a group of senior lenders who appear to control $150 million or more in secured debt - close to half the money that Tierney and other investors borrowed to buy the newspapers in 2006. Both sides say they want to continue publishing both the Daily News and Inquirer.

Last week, the group of local investors - known for now as Philly Papers LLC and comprising Bruce Toll, the Carpenters Union pension fund and Penn Matrix Investments - unveiled a reorganization plan that would pay about 21 cents on the dollar to the company's senior lenders, a group of hedge funds and other financial institutions, led by Angelo, Gordon & Co. and the CIT Group Inc.

Collectively, the secured creditors are owed about $318 million but under Philly Papers' plan, they'd have to settle for a package of cash and real estate, valued at $66 million.

The senior creditors apparently have a different plan - taking over the newspapers themselves through a competitive bidding process scheduled for late October, now being set up as part of the bankruptcy reorganization.

One critical issue is whether the senior lenders will have the right to submit a so-called "credit bid," basing a bid on their holdings of secured debt without necessarily putting up new cash.

"Somebody who has $350 million of house dollars is going to be able to outbid everyone," noted Chief U.S. Bankruptcy Judge Stephen Raslavich at a hearing yesterday.

Tierney has contended that without cash from new investors, the newspapers would continue to struggle with more debt than they can afford.

The newspapers' attorneys filed a proposal in Bankruptcy Court yesterday suggesting procedures for the competitive bidding process that would prohibit a credit bid.

But the procedures must be approved by Raslavich, who scheduled a Sept. 15 hearing on that and other issues.

Fred S. Hodara, an attorney for a steering group of six major lenders, said that the Bankruptcy Code clearly permits credit bidding and that his clients expect to use it.

"They've already put their money in," Hodara told reporters after the hearing. ". . . We want to own this company."

The compromises described yesterday in Bankruptcy Court were on relatively smaller issues:

* Citizens Bank and other senior lenders agreed to provide the newspaper company with $15 million in temporary "debtor-in-possession" financing, at a current interest rate of roughly 12.5 percent.

* The lenders backed off an original demand that they have veto power over the company's reorganization plan.

* The company retained the exclusive right to propose and promote its reorganization plan, through Nov. 2, the projected end of the bidding process for entities interested in submitting proposals to take over the company. But potential bidders will have the right to talk with union leaders with the company's collective-bargaining units, and union leaders will be allowed to meet with senior lenders.

John Laigaie, president of Teamsters Local 628 and a strong Tierney supporter, said he had no inclination to talk with the lenders.

"These out-of-town creditors, I don't think they have our local interests at heart, one bit," Laigaie said. He expressed concern about any conversations involving future contracts until the future ownership of the papers is clear.

Bill Ross, administrative officer of the Newspaper Guild, representing newsroom employees and advertising salespeople, said he wanted to hear what the lenders - as well as the Philly Papers group - have in mind for the unions. "We'd be talking, not agreeing to concessions," Ross said.

Apart from the courtroom skirmishing, attorneys for the lenders became more accessible to reporters this week and put a local face on their group - perhaps in response to a recent "Keep It Local" campaign led by Philly Papers, featuring buttons, stickers and placards that celebrate local ownership of the newspapers.

Robert J. Hall, publisher of the Daily News and Inquirer from 1990 to 2003, when the papers were owned by Knight-Ridder, showed up in Bankruptcy Court yesterday and was publicly identified for the first time as a consultant to the creditor group.

Hodara said that Hall, 64, would play some sort of management role, as a manager, consultant or board member, if his clients are successful in taking over the newspapers.