Freedom Communications' BK Charm Offensive

Fitz: Freedom Communications has been an easy target for potshots since filing for bankruptcy in September. We were probably not the first here at Fitz & Jen to crack wise about the spectacle of the Ayn Rand (left) libertarian parent of The Orange County Register running off to the protection of the federal bankruptcy courts. (See our Sept. 1 item, “Freedom Shrugged: ‘O.C. Register’ Parent Makes Bankruptcy Official,” with its lede: “WWARD: What Would Ayn Rand do?") We surely won’t be the last with the cheap puns.

Some financial writers are particularly harsh on Freedom’s bankruptcy plan, which awards 98% of broadcaster and newspaper publisher’s equity to its senior lenders, envisions paying out just $5 million going to unsecured creditors including pensioners – and sets aside 2% of stock for the Hoiles family equity holders and other insiders. As John Foley and Lauren Silva Laughlin pointed out recently (second item) in The New York Times’ breakingviews.com, add in the warrants the equity holders will get to buy as much as 10% of the company and “that’s more than what’s going to unsecured creditors, which normally are right behind secured lenders in dividing the spoils of bust companies.” Former Freedom CEO Alan Bell calls the plan “immoral and wicked.”

So late Wednesday, just as we business reporter types were turning off the laptops for the long Thanksgiving weekend, Freedom fired off a set of talking points defending or, as they would probably prefer to term it, explaining their reorganization plan.

The executive summary: Unsecured creditors will do pretty darn good under the plan, getting a larger percentage of the actual equity left to split up than under most bankruptcies. Freedom didn’t fend off a potential sale with its bankruptcy -- nobody was interested in buying it. And the company did not try to hide financial information in the bankruptcy case, as the U.S. Trustee alleged, and it won’t do it again, ‘kay?

Verbatim excerpts from Freedom are below the fold:

Question: The unsecured creditors in the Freedom case, who include a number of former top executives who participated in the non-qualified pension program, argue that they're owed $300 million and that only a $5 million share is unfair.

Answer: First, remember that under Chapter 11, there are absolute rules for the priority in which claims are paid. Under these priority rules, Freedom's first responsibility is to the secured lenders - the banks who loaned the company money - then to the unsecured creditors and finally to the shareholders. In Freedom's plan of reorganization, the secured lenders would reduce the company's debt from $770 million to $325 million in exchange for a 98 percent share in the reorganized company. The unsecured creditors would share in $5 million. The current shareholders would receive a 2 percent interest in the reorganized company with an opportunity to buy up to 10 percent more. In putting together the plan, Freedom's bankruptcy team worked very hard to align everyone's interests. For that reason, the existing shareholders will get nothing if the unsecured creditors don't approve the plan.

Now, all of that being said, there has been a great deal of mis-information about what the unsecured creditors are owed. In fact, the $300 million number refers to liabilities, which are balance sheet items and not the same as claims. Approximately $275 million of these liabilities are obligations the company intends to fulfill in the future - such as deferred taxes and funding for the qualified pension plan. In reality, the cash claims of the unsecured creditors are subject to compromise in the bankruptcy case and total about $25 million (excluding certain contingent and disputed litigation claims). This means that the $5 million in Freedom's plan of reorganization could represent a 20 percent recovery of the unsecured creditors' cash claims, a much better recovery than in many other Chapter 11 cases..

Question: With the company filing for bankruptcy, why have so many top executives received large bonuses? And why did Scott Flanders receive such a large bonus just before he left the company?

Answer:  First, in regard to Scott Flanders, the former CEO, his bonuses were paid on his performance against criteria contained in his employment agreement. Also, remember that bonuses are paid after the fact. So a bonus he received shortly before leaving the company was for work already performed.

Now, about bonuses in general. They are not just for executives. Every full-time Freedom associate who has been with the company at least one quarter is eligible for a bonus. In fact, most of the dollars paid out in bonuses have gone to associates other than top executives. The amount of bonuses, no matter who the recipient, is determined by a defined set of requirements that measure performance against predetermined goals.

Question: There has been some criticism of the company for not pursuing the sale of the company. How do you respond?

Answer: As part of the agreement with its lenders that preceded the bankruptcy filing, Freedom agreed to reorganize on a stand-alone basis pursuant to a plan of reorganization and not to actively market the company.  Freedom and its lenders agreed that a plan would be the best way to maximize value, preserve jobs and expedite the company's exit from bankruptcy.  On the other hand, the company and its lenders agreed that Freedom could consider and negotiate any offers presented by potential buyers.  To that end, Freedom instructed its financial advisors to receive any bona fide offers from potential buyers.

And there simply haven't been any to date.

Question: The U. S. Trustee in the bankruptcy proceeding criticized the company for providing incomplete financial information. Why was this?

Answer: Freedom is not hiding anything, and has nothing to hide. The company provided financial information and made other disclosures consistent with what had been provided in other cases like Freedom's. The U.S. Trustee thought that some information should be added. Rather than quibble and cite the procedure that was followed in other cases in the past, Freedom decided to go ahead and accommodate the U.S. Trustee's requests. The company, therefore, filed amended statements and schedules with the Court.

Comments

[Anonymous]

In response to the statement below:
Being eligible is different than actually recieving. That's obvious. And so is the fact that this statement is a lame attempt at making these bonuses acceptable.

Answer: First, in regard to Scott Flanders, the former CEO, his bonuses were paid on his performance against criteria contained in his employment agreement. Also, remember that bonuses are paid after the fact. So a bonus he received shortly before leaving the company was for work already performed.

Now, about bonuses in general. They are not just for executives. Every full-time Freedom associate who has been with the company at least one quarter is eligible for a bonus.