Distressed Debt News: Lee Bankruptcy Filing

Today, Lee Enterprises ("Lee" or "the Company") filed for Chapter 11 bankruptcy protection in Delaware. This was anticipated per an 8K filed last week by the Company that stated:

"Pursuant to the Lee Support Agreement and the Pulitzer Support Agreement, the News Release announced, among other things, that Lee and its majority-owned subsidiaries expect to file voluntary petitions for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code on or about December 12, 2011. Lee’s interests in Tucson, AZ, and Madison, WI, are not included in the filing. The Chapter 11 filings will be made pursuant to a “prepackaged” restructuring plan with the support of Lee’s Supporting Lenders (who represent approximately 94% of the total outstanding loans) and the Supporting Noteholders (who have provided unanimous support).
For those interested, the Lee Bankruptcy docket can be found here: Lee Bankruptcy Docket and the main claims agent page can be found here: Lee Claims Agent Page. As usual, we've added the docket to our bankruptcy docket page which can be found here: Distressed Debt Investing collection of bankruptcy dockets.

For reference, as of this evening, Lee Enterprises's term loan as well as its revolver, traded in the 66-68 context. As of the petition date, there was $548M of Term Loan outstanding and and $308M of outstanding borrowings under its revolver.

Negotiations for this pre-pack have been going on for sometime. For those in the market, you may remember Lee attempting to market a refinancing package earlier this year in the April/May time period for its debt maturing in 2012. When that didn't work out, negotiations began and eventually entered into a support agreement in August of this year with votes on the pre-pack being solicited in November.

The essence of the plans is as follows:
  • $40M DIP via Deutsche Bank will roll into new revolving credit facility
  • Existing holders of pre-petition credit facility will receive their $689.5M of a new first lien term loan facility and $175M of a new second lien facility (that has been backstopped by Goldman Sachs, Mutual Quest [Franklin Templeton], Monarch, Mudrick, and Blackwell Partners. The first lien facility is set to mature in December 2015, with the second lien maturing in April 2017. The pricing is L+625, with a 1.5% floor and 15% respectively (with a 5 point OID on the second lien)
  • Second lien lenders will also receive 15% of the outstanding stock on a PF basis
  • The "Pulitzer" noteholders will increase their coupon to 10.55% (that increase with time) and extend the maturity to 2015 and will see some debt paydown
  • Existing shareholders will retain their interests (holding 85% of the company before management incentive plans).
I will not that the 8K had slightly different figures for equity retention versus the disclosure statement (87% vs 85%).

Financial Projections from the Disclosure Statement (Exhibit F), are as follows:

Income Statement

Balance Sheet

Cash Flows

LTM EBITDA at Lee is around $170M. This versus the anticipated $990M of debt leads to leverage of 5.8x. This seems awfully high when you consider McClatchy trades at 5.5x today, but this seems to be already reflected in the market given the current trading price of Lee's credit facilities. I.E. With ~$860M of pre-petition credit facilities trading at 67, the market is implying a value of about $575M for the entity. This implies the new first and second lien paper will trade at a steep discount when they begin to trade. With that said, the company is projected to generate free cash flow of about $55M each year in the projection periods which will be used to de-lever the balance sheet.

First day hearings are scheduled for noon tomorrow in Wilmington with standard first day motions for a company putting forward a pre-pack. Lee is expected to exit bankruptcy within 60 days. We will keep readers updated if trading levels get to a price that interests us.


David Merkel 12/13/2011  

Not sure what future the newspaper business has, especially in low-density areas where Lee has most of their papers.

That said, operating cash flows don't look too bad in the past. Why did LEE decide to file?

David Merkel 12/13/2011  

Wait, I think I get it. LEE had debt that they couldn't easily roll over?

Anonymous,  12/13/2011  

575 Million Enterprise Value over 1.3 million daily subscriptions. About $500 per subscriber.

Contrast this with the 200 Million Berkshire paid for the Nebraska papers (about 200,000 daily). About 1,000 per subscriber.

Great work. Appreciate your insight.

Anonymous,  12/14/2011  

They had about $1 billion of debt coming due that they couldn't refinance (tried in April 2011 per their 10-K). So they had to file.

I still think this company is too oeverlevered coming out of Ch11. You cannot assume LTM EBITDA is going to carry forward coming out of petition filing given the high uncertainty of print advertisement from which the debtor derives 70% of its revenues. If you sensitize cash flows, I don't see how they will be able to make their debt service payments. I couldn't find any covenants on the new proposed tranches of debt coming out, I'd definitely keep my on DSC Ratio, given the short tenor of these loans. This may be Ch 22.

Commodity Exchange 12/20/2011  

I still anticipate this aggregation is too oeverlevered advancing out of Ch11. You cannot accept LTM EBITDA is traveling to backpack advanced advancing out of address filing accustomed the top ambiguity of book advertisement from which the debtor derives 70% of its revenues. If you sensitize banknote flows, I don't see how they will be able to accomplish their debt account payments. I couldn't acquisition any covenants on the new proposed tranches of debt advancing out, I'd absolutely accumulate my on DSC Ratio, accustomed the abbreviate tenor of these loans.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.