Fun CL bankruptcy news! — UPDATE
July 22, 2009 at 2:17 pm by Scott Henry in Inside CL
(UPDATE — For reasons beyond our understanding, the bankruptcy court’s next hearing date will be Wednesday, July 29, rather than Monday, as indicated below.)
Those who still care have their calendars marked for Aug. 25, the date of the Great CL Equity Auction that will determine the future ownership of our li’l old alt-media empire. But wait! There’s a new deadline looming on the horizon for the truly obsessed. That’d be July 27, this coming Monday, the fateful day when the lovely and talented bankruptcy Judge Caryl Delano in Tampa sets the rules of the aforementioned auction.
According to CL CEO Ben Eason in a new interview with Chicago Reader media critic Micheal Miner, the rules of the auction could either boost or destroy his chances of hanging on the company. That’s because Atalaya Capital Management, CL’s primary creditor, already has $31 million sunk into the company. Unless the judge places restrictions on how the bid money must be spent, Atalaya could, theoretically, bid up to $31 million to win the auction, then pay itself off and take sole ownership of the company.
Still awake? Here’s Eason’s take:
“What the issue really is is who’s going to keep their money in. Who’ll be involved in this thing for the long haul. It appears the way Atalaya is coming at this they’ll put their money in and immediately take it out. That’s part of their financial engineering, it’s a typical Wall Street hedge fund being slick with the money. But we’re looking to make sure that whoever bids at the equity auction truly wants to hold the company.”
In other words, although this isn’t made explicit in the Miner piece, Eason expects the judge to mandate that a sizable chunk, if not all, of the money represented by the winning bid must be invested directly into the company to ensure its continued viability.
And if that doesn’t happen?
“It’s over,” said Eason. “It’s the same thing as a foreclosure.”
OK, there’s your drama. But I did spot what I’d have to say are errors in the Miner piece. Such as:
Atalaya is in the catbird seat. The first $2 or $3 million raised in the auction will pay back small creditors and provide the company with working capital. But after that the money all goes to Atalaya until it gets back the money it’s owed, now about $31 millon. In effect, it can bid that high simply by taking money out of one pocket that it will put back in another.
Actually, Atalaya only stands to be paid back $12 million, as the result of a July 13 court action in which the venture capital firm agreed to write down the value of its CL debt by $19 million. This means that if another bidder swoops in and buys the company, Atalaya could only expect to get $12 million — and would instantly lose $19 million. Frankly, to me, this fact suggests that Atalaya is likely to be a more aggressive bidder: Winning ownership of the company now seems to be its only hope of being made whole.
Next, Miner suggests that the judge could disqualify Atalaya from bidding because of the financing quirk described above. I don’t see that as an option, but it would be reasonable for the judge to declare that a good portion of the winning bid must be used as operating capital in the company.
Now, is there the chance that someone might swoop in and outbid both Eason and Atalaya? Certainly, not too many folks seem eager to invest more money in print media nowadays, but, hey, Cox recently managed to unload five daily newspapers and 10 weeklies, so miracles can happen.
July 22nd, 2009 at 5:57 pm
The bidding is surely to be fast and furious. Scott Henry and Thomas Wheatley (and the others) are surely worth more than $31 million.
July 23rd, 2009 at 1:14 pm
Scott, my understanding of this is that after the first $2.5 million in bids, the next $19 million goes to pay the “deficiency” part of the $31 million owed Atalaya. Any bids above that go to pay down the $12 million note. That is because Atalaya wants the unsecured portion of the debt paid off first. (Some of this interpretation is my practicing law without a license, but I believe that is what will happen.) The purpose of bankruptcy is to preserve and recover assets for the creditors, not to make decisions based on one party’s “passion.” Atalaya overwhelming is the largest creditor, and therefore has a superior claim on whatever is bid for the equity.
BTW, Atalaya’s proposed opening bid included $1 million invested into the company. Ben’s proposed opening bid did not make any sort of similar proposal. And it’s unclear why Atalaya would take money out while Ben would leave it in. If Atalaya ends up owning the company, which seems more likely now than ever before, the best way to recover its money is to rebuild the company. The big question is whether some of the papers, especially Atlanta, are salvageable.
I am, of course, a former CL editor and dissident shareholder.
July 23rd, 2009 at 1:55 pm
Why wouldn’t the Atlanta paper be salvageable?
July 23rd, 2009 at 3:02 pm
Thanks, John, for your appraisal of the situation. It’s all hellishly complicated and none of us are bankruptcy specialists. (Give me a good strip club/Mafia conspiracy trial any day.) So I have to admit I’m not sufficiently informed to confirm or challenge your interpretation.
That said, I think we agree there’s little chance Atalaya would be disqualified from bidding.
As for the Atlanta CL being “salvageable,” I think you’re referring to our net revenue, not our editorial quality. Although I don’t have access to our balance sheets, I am assured and have reason to believe that our paper is on a decent financial footing, relatively speaking. Let’s all hope I’m right about that.
July 23rd, 2009 at 3:19 pm
Scott, the editorial quality, the work of the writers, editors and photogs — as well as the work of many, many others throughout the company is always superior. However, clearing the people in charge have little commitment to editorial quality. That also begs the question of why people who have done great jobs are promoted to the status of “cost reduction,” while the people who caused the train wreck survive.
On Atlanta’s future, my read of the numbers is that both Atlanta and Tampa face daunting problems. I think those two papers could be salvaged, but not by — as they’re doing in Tampa to drive up the number of web hits — running photos of tattooed vaginas.
July 23rd, 2009 at 4:32 pm
Although $19 million of the money Atalaya is owed has been recategorized, it hasn’t evaporated. Atalaya might not expect to get it back but it hasn’t waived its claim on it.
I think it might be more accurate to say Chapter 11 bankruptcy is meant to serve two purposes: to serve the creditors but also, and primarily, to resuscitate the corporation. It’s up to the judge to strike the balance, and customary, especially in the early stages, to favor the corporation’s interests as defined by its managers.
July 23rd, 2009 at 4:58 pm
I concur with Mike. Yes, conserving assets for creditors is balanced with stabilizing a company, as long as that company shows that it has a chance of survival. If it doesn’t, Chapter 11 moves to Chapter 7. I think many people would question whether the best interests of the company are served by propping up the current management. Other alternatives are weathering the financial storm. CL isn’t, and that’s directly attributable to bad decisions and mismanagement.
July 23rd, 2009 at 6:26 pm
Upon closer perusal of the court docs, I am prepared to agree with Michael and John that the $19 million has been reclassified as non-secured debt, but not erased. Which means Atalaya could still collect some portion of that amount, in addition to their $12 million in secured debt.
My take is that the bidding rules will help determine, in large measure, just how much Atalaya could stand to recover post-auction.
July 24th, 2009 at 12:18 am
What Ben is complaining about is that anything that is bid over about $2.5 million goes to Atalaya to pay, first, the unsecured $19m and then the secured $12m, not that any is likely to bid that much for a company whose value is, maybe, $10m. Whatever, what Atalaya bids, it then gets back (after the first $2.5m). Keep in mind that, when considering Ben’s allegations that this is somehow unfair, he has no equity in the company. He borrowed more than the company was worth, and thus the only people with money in the game are Atalaya and the second lender BIA. Ben is shocked — shocked! — that Atalaya is offended that he wants to keep all of their money, stiff them out of most of it, and still run the company. Maybe he can convince the judge that his reckless actions — actions that prompted his blue ribbon board to quit rather than be part of the deal — support his claim that he is the best person to run the company.
July 24th, 2009 at 9:55 am
Ben Eason has lost all credibility. He has ruined the Chicago Reader and the Washington City Paper, once wonderful publications that many people were surprised he could even acquire.
Lending Eason so much speaks poorly of Atalaya’s judgment. But if anyone from Atalaya is reading this post, please be aware that you will have to invest in editorial to salvage what were once powerful brands in their markets.
The Reader, in particular, was beloved by a community that was both entertained and sustained by it. Unfortunately its quality had slipped by the time Eason arrived. Look back at issues from the late 1990s, say, and ask how you can recapture that magic. Enough with the Web snark; invest in reporters, writers, photographers and editors — they had made the Chicago Reader and Washington City Paper great.