Tuesday, October 7, 2008

Zell's Hell

Sam Zell, who bought the Tribune Company (and thus the Chicago Cubs) on a mountain of credit, is about to get squeezed hard:

Banks and investors who are losing money on the record $1.7 trillion of high-yield, high-risk loans made in 2006 and 2007 are charging borrowers an average of 1.64 percentage points more in interest to amend borrowing agreements and avoid default, according to Standard & Poor's. That's the highest since 1997 and almost eight times more than the first half of last year.

Lenders, reeling from an almost 20 percent decline in loan prices, are punishing borrowers in jeopardy of breaking their loan agreements as the economy teeters on recession. As many as 135 companies are in danger of breaching targets set by their banks, S&P says. Sam Zell's Tribune Corp. and Leon Black's Realogy Corp. may soon trip their covenants, according to Moody's Investors Service, which like S&P is based in New York . . .

. . . Tribune, the Chicago-based media company bought by billionaire investor Zell last year, needs to sell the Chicago Cubs baseball team and improve revenue to avoid breaching its covenants, said Mike Simonton, an analyst at Fitch Ratings in Chicago. Tribune has $12.5 billion of debt and its loans were quoted as low as 37.5 cents on the dollar yesterday, according to S&P.
I'm no financial expert, but generally speaking, when you breach the covenants in your debt obligations, lenders can pretty much take a blowtorch to your business.

I'm also no expert on the sale of ballclubs, but I do seem to recall that Zell and Major League Baseball itself had desired that the purchase of the Cubs be a debt-heavy transaction, whether it be to favor one potential ownership group or otherwise. As I sit here watching the financial system implode, I can't help but think that if someone wanted to swoop in at the last minute and give Zell a bunch of cash instead, they'd get themselves a pretty good deal on a pretty nice asset.


Craig Calcaterra said...

Sorry for so many financial crisis posts today, but it's not as if someone who gets a paycheck because big banks financial companies hire his firm can really ignore it.

Anonymous said...


I think all the proposed buys of the Cubs were also debt heavy, so the restructuring of the deal may reduce the selling price, or more typically, require the buyers to infuse more cash. "Barbarians at the Gate" comes to mind, with Ted Forstmann's characterization of PIK securites as "wampum". Same thing here.

Mark said...

Hey, don't apologize. It's your blog, and baseball and finance are both interesting. And surely I'm not the only one still missing Doug Pappas...

Ted Spradlin said...

If Tribune's debt is at 37.5 cents on the dollar, could that be another distressed "asset" The Bailout could absorb?

If wooden arrows for kids from tiny Myrtle Point, OR are part of The Bailout, why not put something in there that brings happiness millions all over the world? Hillary Clinton's a Cub fan, maybe she could help.

Zell's gonna need every break he can get, trying to sell a Newspaper chain to a bigger fool in this Equity Market and Internet Age.

Isn't the global economy de-leveraging from the bigger fool/excess debt creation phenomena?

He may get the tax breaks he was looking for by floating 25 year debt on the Cubs (BizofBaseball). Those losses might just be in the form of billions breaking up Tribune right now. Better call Hillary.

Pete Toms said...

Thanks C, hadn't seen this. ( I digress, but am I the only one out there who hadn't a clue what libor is up until a few weeks ago? )

I've been wondering also how the credit crunch will effect the Cubs sale. I'm gonna quibble on a few of your points though and add one of my own.

1. I don't believe that MLB is a fan of Zell's proposed "debt heavy" transaction. MLB, like all leagues, have restrictions on debt / equity ratios ( or somethin like that ). My impression has been that they are willing to hold their nose on the Cubs deal because they want to avoid a nasty dispute with Zell.

2. I don't think Zell would prefer a whole whack of cash on the barrel because of capital gains. A quote from our friend Maury @ Biz of Baseball;

"The problem for Sam Zell and Tribune is that an outright sale would mean paying taxes in excess of $400 million. Tribune purchased the Cubs in 1981 for $20.5 million. With the combined sale of the Cubs, Wrigley Field, and a 25 percent stake in ComcastSports Chicago, the price should easily exceed $1 billion. As reported by the Chicago Tribune, Zell will be looking to get creative with the deal.

Instead, he wants to create what's known as a leveraged partnership between the buyer and Tribune to own the team. The partnership would borrow money to buy the team, and the proceeds from the loans would go to Tribune. The media company would retain a small stake in the partnership, less than 5 percent, giving it some exposure to the loans.

Under the terms of a leveraged partnership, only borrowed money can be distributed tax-free. Consequently, in some of these deals as much as 90 percent of the purchase price is financed with debt to maximize the cash payout, Willens said.

3. As problematic as the mountain of money Zell borrowed to buy Tribune is the mountain of money he wants the Cubs purchaser to borrow. Isn't that money gonna be a lot more difficult to scare up now?

Maury, are you out there?