Tribune examiner finds second step of LBO rendered company insolvent

By Caroline Salls

Pittsburgh, July 26 - Tribune Co.'s examiner Kenneth N. Klee reported on Monday that the company and its guarantor subsidiaries were likely rendered insolvent and left without enough capital as a result of the second step of its 2007 leveraged buyout transaction, according to the examiner's report filed with the U.S. Bankruptcy Court for the District of Delaware.

Klee said the company's procurement of its solvency opinion as part of the second step of the transaction "was marred by dishonesty and lack of candor" about the role played by Morgan Stanley in the solvency opinion and "on the question of Tribune's solvency generally."

In addition, the examiner said Tribune's senior financial management did not tell the company's board and special committee about relevant information underlying management's October 2007 projections, which were used in the solvency opinion.

The examiner said he also found evidence that one important component of the projections "went beyond the optimism that sometimes characterizes management projections."

"This component of the projections bears the earmarks of a conscious effort to counterbalance the decline in Tribune's 2007 financial performance, and other negative trends in Tribune's business, in order to furnish a source of additional value to support a solvency conclusion," Klee reported.

"Although not fitting neatly into one of the recognized badges of fraud, the record also shows that fiduciaries charged with the responsibility for overseeing management's actions and determining whether the step-two transactions would render Tribune insolvent did not adequately discharge their duties."

Red flags

Klee said that Tribune's financial performance deteriorated after the first step of the LBO transaction closed.

The examiner said this deterioration, combined with the decline in the price of the company's common stock, the amount of debt Tribune would incur if the second step closed and broader market indications, "raised red flags signaling Tribune's insolvency if step two went forward."

Klee said a "relatively simple mathematical calculation" would have showed that the proposed step-two solvency opinion translated into an implied mid-point per share value of about $39 per share, well above both the $34 tender offer price that had been locked in during the spring of 2007 under better market conditions and the trading value of Tribune's stock in the late fall of 2007.

The examiner said that both the Tribune board and the special committee approved the solvency opinion, even though no third-party adviser ever evaluated it.

Fraud 'somewhat likely'

Klee said "a court is somewhat likely to conclude" that the Tribune entities incurred the obligations and made the transfers in step two of the transaction "with actual intent to hinder, delay and defraud creditors."

Additionally, Klee said that although the company's directors were not careful to ensure that the solvency condition was satisfied in step two, Delaware fiduciary duty law would probably not find them liable.

However, the examiner said the court might rule that one or more of Tribune's officers did breach their duty in connection with step two of the transaction.

The examiner also said he didn't find any credible evidence that the company's large stockholders, lead banks and financial advisers and the Zell group aided and abetted a breach of fiduciary duty or committed malpractice.

Klee said it is also unlikely that a court would subordinate or disallow any portion of Tribune's LBO lender debt.

Tribune, a Chicago-based media company, filed for bankruptcy on Dec. 8, 2008. Its Chapter 11 case number is 08-13141.

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