The McClatchy Company announced last week that it plans to freeze certain nonqualified supplemental executive retirement benefits for a small number of pension plan participants as the company tries to stabilize a dire financial situation. The announcement was a follow-up to the companys third quarter earnings report in which the company said it requested a waiver from the Internal Revenue Service for defined benefit pension plan obligations for 2019, 2020 and 2021. The IRS denied the request.

Though the defined benefit plan had assets of $1.32 billion, including $580 million in voluntary contributions by McClatchy exceeding the minimum required contributions, the plan was underfunded by $535 million as of March 31, 2019. McClatchy estimated an additional $124 million in pension plan obligations would be due throughout 2020. Because of the IRSs denial of its waiver request, McClatchy will seek relief from other sources, including the Pension Benefit Guaranty Corporation (PGGC), lenders, bondholders, and possibly legislators to ease the burden of minimum required contributions under the Employee Retirement Income Security Act (ERISA).

We are working hard to find solutions for the company and its more than 24,000 pensioners. We have voluntarily contributed nearly 44% of the existing assets in the plan rather than limiting company contributions to the minimum amounts required to be contributed by law. But our current workforce of nearly 2,800 employees represents about one in 10 pensioners. Those who joined the company in the last 10 years do not participate in a plan they are working to support, one that was frozen to new participants in 2009, said Craig Forman, McClatchy president and CEO, in November.

For the third quarter of 2019, McClatchy reported a net loss of $304.7 million, or $38.43 per share, compared to net income of $7 million, or $0.90 per share in the third quarter of 2018.

In the January 2, 2020 announcement of the freeze, chief financial officer Elaine Lintecum said, This decision is not taken lightly, but at a time when the Company is actively negotiating the future of the qualified pension plan, it would be inconsistent with our culture to continue payments on the non-qualified plans.

The announcement also said that this action does not impact continuing operations or any benefits covered by the $1.3 billion qualified pension, including distributions from that plan. The company also said it has sufficient liquidity for its current operational cash needs and obligations. No additional guidance was provided.

This dire news follows a rocky period for McClatchy. On September 9, 2019, the publisher received a letter from the New York Stock Exchange American, notifying them that they were not in compliance with NYSE Sections 1003(a)(i) and 1003(a)(ii) and were in danger of losing their NYSE American listing. McClatchy offered a compliance plan on October 9 stating how they planned to regain compliance by March 9, 2021. On December 13, NYSE American accepted their plan.

As of 5:33 p.m. EST on January 6, 2020, McClatchy Co. stock closed at $0.48 per share, $0.19 higher than its 52-week low of $0.29, but up $0.02 from the time of the announcement.

Insider Take:

This announcement has industry experts questioning whether McClatchy can find a legitimate solution to its pension woes without filing bankruptcy or initiating a fire sale. Legislative relief would require quite an effort and would likely not be swift enough to reduce the companys obligations. Any waivers by the PBGC would cause a dangerous precedent for companies in similar situations, unless the waiver or resolution involved pension obligations moving forward, not past or current obligations. As for a fire sale, it seems any potential buyer would want to avoid taking on a company with so much pension debt without some serious financial concessions in other areas. Well be watching to see how McClatchy gets out of this seemingly hopeless situation.