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A plan to have Chatham Asset Management take ownership of bankrupt McClatchy Co. swiftly ran into obstacles as a government agency raised concerns that the newspaper chain’s dealings with the hedge fund disadvantaged its pensioners.

The courtroom fight, part of bankruptcy proceedings that McClatchy kicked off last week, traces back to a series of debt deals Chatham arranged in 2018. They were seen by some in the market as a clever play – if they can withstand legal scrutiny.

Chatham owned the vast majority of McClatchy’s unsecured bonds in 2018 when it helped provide a new loan for the newspaper chain to extinguish those old debts. While the deal gave McClatchy more time to repay its borrowings, it was a boon for the hedge fund because it was able to trade in bonds that had been on equal footing with pension claims and other creditors for new secured debt that allowed the fund to leap-frog them in the repayment line.

On Friday, the U.S. agency responsible for insuring pension plans demanded a Manhattan bankruptcy court allow time to scrutinize the deals, saying they raise “significant concerns of possible fraudulent transfer.”

PBGC Objections

“We need an opportunity to investigate,” Kimberly E. Neureiter, an attorney for the government’s Pension Benefit Guaranty Corp., told the court.

McClatchy’s bankruptcy plan calls for handing ownership of the company to Chatham in exchange for extinguishing some of its debt. It’s also seeking to terminate its pension and hand control to the PBGC, which would continue paying the company’s pensioners.

But the agency objected to a proposal that may give the hedge fund broad legal protections for the past deals. Judge Michael E. Wiles agreed, saying there was no reason, so early, to make it harder to challenge those transactions.

‘Can’t Do That’

“I don’t really understand, on the very first day of this case, why I should be entering an order that essentially approves stipulations from you that would be obstacles to the PBGC,” Wiles said in the hearing. “I can’t do that.”

Chatham’s attorney, Andrew N. Rosenberg of Paul Weiss Rifkind Wharton & Garrison, said that wasn’t the hedge fund’s intent: “We weren’t trying to preclude anyone.”

Representatives for Chatham and McClatchy declined to comment further.

McClatchy, owner of the Miami Herald, Kansas City Star and other newspapers, filed for bankruptcy on Thursday. It said it planned to continue operating newsrooms as usual during the Chapter 11 proceedings.

Chatham has long been involved in financing McClatchy and by 2018 was its largest shareholder. The hedge fund snapped up almost all of McClatchy’s unsecured bonds, according to regulatory filings that year, and swapped a chunk of them for secured debt.

Derivatives Bets

Initially, the move could have led to two windfalls for Chatham at once. While improving the firm’s position as a lender, the transactions also boosted the value of a bet in which the hedge fund had used derivatives to insure other investors against a default by McClatchy. The deal effectively would have meant that a bankruptcy wouldn’t have triggered a payout on the contracts, known as credit-default swaps. The newspaper publisher and Chatham later tweaked the terms of the swap so that the derivatives would still pay out in the event of a default.

McClatchy was essentially insolvent when it entered into the debt swap in 2018, potentially leading to arguments that Chatham’s claims should be “partially or completely subordinated,” the pension agency said, asking that potential claimants be given time to pursue action.

Lawyers for Chatham agreed to move the request for legal protections to a later hearing.

Pension Problems

McClatchy has struggled to manage the liability of its qualified pension, a private plan for employees that was underfunded by about $535 million as of an accounting last year.

In January it signed an agreement with the PBGC that allowed it to skip a payment while continuing to have the agency take over the $1.375 billion plan altogether. The PBGC covered the skipped payment, and pensioner payouts weren’t interrupted.

In its bankruptcy plan, McClatchy is seeking to terminate its qualified pension and appoint the PBGC as its trustee, according to a statement Thursday. In that scenario, the PBGC would continue to provide plan participants their benefits, and McClatchy would pay the PBGC $3.3 million each year for 10 years, along with 3% ownership of the company.

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