JPMorgan e-mails show concerns about Tribune deal

WILMINGTON, Del. — JPMorgan Chase executives raised concerns about the credit risk at Tribune Co. one day after it helped finance a leveraged buyout of the media company, according to e-mails presented in court Wednesday.

The e-mails, which emerged during hearings in Tribune Co.'s bankruptcy case, suggested that the bank had serious concerns about the company's finances at the time of the buyout. Some creditors claim the deal was a fraud. The e-mails showed that JPMorgan executives discussed downgrading their internal credit rating for Tribune Co. right after the buyout closed in December 2007.

Tribune Co. owns the Chicago Tribune, the Los Angeles Times, several other major newspapers and more than 20 television and radio stations. The company filed for bankruptcy protection in December 2008, less than a year after the buyout saddled Tribune Co. with more than $12 billion in debt. A court-appointed examiner has concluded that parts of the buyout were probably fraudulent.

U.S. Bankruptcy Judge Kevin Carey must decide whether to approve Tribune Co.'s proposed reorganization plan, a competing plan submitted by dissident bondholders led by Aurelius Capital Management, or neither. Wednesday was the third day of hearings, expected to last two weeks.

Junior bondholders who have joined Aurelius in objecting to Tribune Co.'s plan have alleged that JPMorgan, Bank of America and other banks that financed the buyout engaged in fraudulent conduct because they knew the debt would leave Tribune Co. insolvent.

JPMorgan's qualms about Tribune Co.'s finances emerged in testimony by Miriam Kulnis, an executive in the bank's special credit group. She was testifying on behalf of Tribune Co.

"It's no secret that we were concerned about this company's solvency," Kulnis said during cross-examination by an attorney for bondhonders critical of the deal.

The attorney presented Kulnis with e-mails sent to her by JPMorgan vice president John Kowalczuk the day after the buyout engineered by billionaire developer Sam Zell closed in December 2007.

In an August 2007 e-mail, Kowalczuk had directed that Tribune Co.'s rating be downgraded based on its second quarter 2007 results and revised third-quarter projections. Kowalczuk suggested in a Dec. 21, 2007, e-mail to Kulnis that JPMorgan further downgrade its credit rating for Tribune Co.

The credit ratings were for internal use, but showed that executives had concerns about Tribune Co.'s credit risk. And the downgrade recommended in December would have triggered a disclosure requirement.

In an e-mail response, Kulnis seemed to suggest that a downgrade more severe than Kowalczuk's recommendation might be warranted, and that a revision could be made in early 2008 rather than right away.

"We don't want to be downgrading a week into the credit," Kulnis noted.

Asked by an attorney for Aurelius to describe what she meant in her e-mail, Kulnis said she didn't remember.

"It was the end of the year. It was kind of a crazy time," Kulnis said.

An attorney for Tribune Co. did not address the e-mails in his questioning of Kulnis.

Tribune Co's reorganization plan would leave the company in the hands of JPMorgan, distressed-debt specialist Angelo, Gordon & Co., hedge fund Oaktree Capital Management. It would shield JPMorgan and other buyout lenders from lawsuits.

The alternative plan submitted by Aurelius would provide for a smaller upfront recovery for creditors in favor of establishing a larger litigation trust that would pursue additional recoveries through lawsuits over the buyout.