McClatchy Hands Win to CDS Buyers as It Tweaks Debt Deal

(Bloomberg) -- McClatchy Co., giving a victory to a group of hedge funds that had bet against it, said it is selling bonds and tweaking the terms of a proposed loan deal.

The struggling newspaper publisher proposed financings that will keep debt at the McClatchy parent company, counter to a previous plan announced in April to move most of its borrowings to a subsidiary. Its prior plan would have hurt the hedge funds that were using credit default swaps to short McClatchy’s borrowings. That sort of creative financing has grown more popular while also attracting controversy in the more than $10 trillion market for credit derivatives.

Hedge funds that stood to lose under the April proposal are at least partly responsible for the latest plan: they’ve offered to buy a chunk of the new bonds the company is selling, according to people with knowledge of the matter. By potentially buying the bonds, they would be funding the publisher while also maintaining their hope for a payout in the future if the money-losing company grows weaker. A spokeswoman for Sacramento, California-based McClatchy declined to comment beyond the company’s statements on its financing plans.

The cost of protecting McClatchy debt against default for five years in the credit derivatives market jumped to about 741 basis points, or around $741,000 a year to protect $10 million of debt against default. The increase is one of the biggest jumps for McClatchy on record, according to data provider CMA.

McClatchy Hands Win to CDS Buyers as It Tweaks Debt Deal

Under the April agreement, most of McClatchy’s debt would have been refinanced and moved into a subsidiary. That would have hurt money managers betting against the company, because those contracts pay out if the parent company defaults, not the subsidiary. As of April, investors had bought almost $500 million of credit default swaps on McClatchy.

On Wednesday, McClatchy proposed selling $310 million of notes due in 2026, and changing the terms of the loan deal it agreed to in April. The more than $700 million loan, in two parts, is with Chatham Asset Management, McClatchy’s largest shareholder and a significant creditor to the company.

‘Best Efforts’

The new notes would refinance 9 percent debt due in 2022. They would be tied to existing swaps contracts on the company’s debt, according to the people with knowledge of the matter, who asked not to be named because the offering is private.

The offering is on a "best efforts" basis, meaning the banks aren’t committing to buying the securities and then selling them but are instead finding buyers first and then selling the notes, according to the people. Representatives for JPMorgan Chase & Co. and Credit Suisse Group AG, banks selling the bonds, declined to comment.

Chatham said in a regulatory filing that it plans to work with the publisher on debt paydowns and may exchange a bond due in 2029 with a 6.875 percent coupon into equity and receive representation on the company’s board.

The hedge fund had been selling CDS protection, meaning it stood to benefit from a drop in the swaps. Hedge funds including Anchorage Capital Group were among the firms on the other side of the trade, people with knowledge of the matter said earlier. Chatham and Anchorage declined to comment.

McClatchy, which publishes newspapers including the Sacramento Bee, the Kansas City Star, and the Miami Herald, has fallen on hard times as print newspaper advertising revenue has declined across the industry. It has posted annual losses since 2015.

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