Morris Publishing Agrees to Put $110 Million in Escrow in Attempt to Avoid Chapter 11

Last Updated on Friday, 09 October 2009 15:43 Wednesday, 30 September 2009 13:49

Mon. Sept. 28, 2009 8:00 p.m. UPDATED. Morris Publishing Group's three bank lending groups took action last week due to the company's failure to pay almost $20 million in interest payments, and inability to make enough profit to comply with cash ratio terms of its various loans.

In an attempt to stay out of bankruptcy court, the company made an out-of-court offer that has been been agreed to by 75 percent of the lenders of its largest loan, an agreement to restructure the company's loans. But 99 percent of the lenders must agree.

The bank lending group made a number of demands. Morris Publishing's subsidiaries agreed to immediately put $110 million into escrow to secure the company's $138 million in short term debt and credit facilities, while the company is given more time to try to find a new lender. The current lenders have refused to refinance the loans.

And, Morris Publishing must turn over $100 million in secured notes against Morris Publishing Groups' assets to the bank lending group that holds its principal senior loan of $278 million. The company reported its total assets as $171 million on its balance sheet at 6/30/2009.

The consortium of banks that holds this $278.5 million senior loan is in second position behind the other two lenders. If the remaining 25% of the consortium do not agree to the deal, the company would seek Chapter 11 bankruptcy protection, according to an afterhours SEC filing today.

A secured note is a note that is backed with collateral. What makes the note "secure" is that the lender has an underlying asset to secure the obligation of the borrower such as a mortgage, which is secured by a home, a "hard" asset.

Morris Publishing Group, LLC announced Friday that over seventy-five percent of the bank lending group had agreed to the terms of a restructuring, but that the restructuring has to go through "a legal process."

The two others loans that are in front of the $278 million loan include a $83 million term loan and $50 million in a revolving credit facility, loans which provide a company with the ability to tap into cash during difficult months, like a line of credit.

In the past, Morris Publishing was able to tap into a $100 million short-term credit facility, if needed, but that amount was reduced to $60 million in total this year. Whether or not the company will be left with any revolving credit is unclear.

The announcement states that the $110 million that must be paid will come from affiliates of Morris Publishing Group, but did not name which of the company's more than thirty-three corporate entities listed as guarantors to the loans would pay the $110 million. The financial health of the labyrinth of the Morris family's various holdings is not public information. .

Interestingly, however, the $110 million figure parallels the $110 million that William Morris III received in Feb. 2009 when he sold off his Mediacom cable company stock, widely reported in financial circles.

It appears that in addition to controlling more than 50% of Morris's assets, the bank lending group will be able to have a representative present at all company board meetings of Morris Publishing Group and at the board meetings of every affiliate of Morris Communications, et al, according to the SEC filing today.

What Happens Next?

Because no final deal has been struck, Morris Publishing Group also announced on Friday that it had received a three-week extension until Oct. 16 to make two semi-annual interest payments of $9.7 million each, originally due Feb. 1 and Aug. 3, on the $278 million senior loan, and a one week extension until Oct. 2 to deal with defaults arising from the overdue interest payments.

Signs that the banks were about to act occurred on Friday, Sept. 18, when Morris received only a three-day extension until Weds. Sept. 23 at 5:00 p.m to make almost $20 million in interest payments, a change in pattern from previous forbearance agreements the company had been receiving over the summer.

In March 2009, the company's auditors Deloitte & Touche, reported that based on 2008 operations, "the Company has short-term obligations that cannot be satisfied by available funds and has incurred violations of debt covenants that subject the related principal amounts to acceleration, all of which raise substantial doubt about its ability to continue as a going concern."

Morris Publishing Group has continued to report significant losses for both the first and second quarters of 2009, despite cutting wages across the company on April 1. What occurred last week was Deloitte & Touche's anticipated acceleration by the banks that hold the company's principal loans.