McClatchy Files Chapter 11 Bankruptcy, Works Toward Restructuring

Company to continue operations as it negotiates its debts and obligations

McClatchy Files Chapter 11 Bankruptcy

Source: McClatchy Co.

While many were celebrating Valentine’s Day, McClatchy was not enjoying hearts and flowers. Instead, McClatchy Co. was trying desperately to save itself and 53 wholly owned subsidiaries by filing a voluntary Chapter 11 petition for bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York. Filing a Chapter 11 bankruptcy petition provides the company with immediate protection while it tries to reach an agreement with secured lenders, bondholders and the Pension Benefit Guaranty Corporation (PBGC).

During the restructuring, the Sacramento-based McClatchy and 30 newsrooms across the country will continue to operate as usual, according to a February 13, 2020 news release. This includes paying employee wages and benefits. In addition to its own resources, McClatchy has gotten $50 million in financing from Encina Business Credit to help the company maintain its daily operations.

“McClatchy’s plan provides a resolution to legacy debt and pension obligations while maximizing outcomes for customers and other stakeholders,” said Craig Forman, McClatchy president and CEO. “When local media suffers in the face of industry challenges, communities suffer:  polarization grows, civic connections fray and borrowing costs rise for local governments. We are moving with speed and focus to benefit all our stakeholders and our communities.”

McClatchy created a new website, McClatchyTransformation.com, with a letter to shareholders and a video to explain their decision to file Chapter 11. In the video, they point out that other well-known companies – Delta, iHeart Media and GateHouse – have all gone through Chapter 11 and emerged on the other side, financially stronger and poised for the future.

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Kevin McClatchy, chairman of the board and the great-great grandson of company founder James McClatchy also offer comments on the need for bankruptcy protection.

“McClatchy remains a strong operating company with an enduring commitment to independent journalism that spans five generations of my family,” said McClatchy.

“This restructuring is a necessary and positive step forward for the business, and the entire board of directors has made great efforts to ensure the company is able to operate as usual throughout this process. We are privileged to serve the 30 communities across the country that together make McClatchy and are ever grateful to all of our stakeholders – subscribers, readers, advertisers, vendors, investors, and employees – who have enabled our legacy to date. We look forward to the continued success of such an outstanding group of colleagues long into the future,” McClatchy added.

In the news release, the company outlined some key business highlights that it feels shows they are making progress in the digital age of journalism:

– In the last three years, McClatchy has grown digital-only subscriptions by almost 50% year-over-year.

– The company has more than 200,000 digital-only subscribers and more than 500,000 paid digital customer relationships, though McClatchy did not define “paid digital customer relationships.”

– From 2017 through 2019, the company had reduced operating costs by $186.9 million, or 23.3%.

– During the same period, the company has paid off more than $153.5 million in debt.

– McClatchy newspapers have earned two Pulitzer Prizes and other awards.

 Works Toward Restructuring

Source: Bigstock Photo

“In this important moment for independent local journalism in the public interest, a reorganized capital structure will enable McClatchy to continue to pursue our strategy of digital transformation and continue to produce strong local journalism essential to the communities we serve. While there is still more work to be done, we are pleased with the progress to date, and are appreciative of our ongoing dialog with our lenders and the PBGC. Moreover, we expect there will be no adverse impact on qualified pension benefits for substantially all of the plan’s participants and beneficiaries,” Forman said.

Among the most significant financial obligations are McClatchy’s legacy pension obligations. The assets of its qualified pension plan are nearly $1.4 billion, including approximately $580 million of voluntary contributions made by McClatchy above and beyond what was required by law. As of March 31, 2019, the plan was underfunded by $535 million and an estimated $124 million in estimated contributions due in 2020. The company has asked the bankruptcy court for permission to terminate the qualified pension plan and to appoint PBGC as the plan trustee. This means the PBGC would pay benefits directly to participants.

McClatchy is trying to negotiate its current pension liabilities with PBGC by paying PBGC $3.3 million every year for 10 years and giving it 3% equity ownership in the company. To have the best chance of a positive resolution, McClatchy has asked the bankruptcy court to appoint an independent mediator to facilitate and supervise discussions with the PBGC. Another key outcome of the bankruptcy proceeding is that McClatchy will be delisted from the New York Stock Exchange and become a privately-owned company, rather than a publicly-traded one.

Insider Take:

Since November, McClatchy has been talking about the possibility of a bankruptcy should it not be able to come to an agreement with the PBGC on its pension obligations, so this move is not a surprise. Short of an acquisition, this may have been McClatchy’s only move. It will be between the bankruptcy court and PBGC to decide McClatchy’s future financial obligations and its fate, but it looks like McClatchy has structured a plan that could help it stay operational without being absorbed by another newspaper group.

In addition to their key financial concerns, McClatchy needs to continue its digital transformation. While the company has made strides in the right direction, a company its size should have far more digital subscribers than it does. It needs to focus on its strengths and show readers in its markets that they offer products and services that no one else can including providing quality local coverage that readers can’t get elsewhere. It should also continue to capitalize on niche opportunities like it has with its Impact2020 political product launched last November. We hate to see more newspapers and media companies fold or merge with major conglomerates, so we hope McClatchy finds a strong path forward.