New life for CanWest papers, but debt remains

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The born-again chain of newspapers held by CanWest Global Communications Corp. will emerge from bankruptcy protection with Wall Street heavyweights as their owners, but still laden with debt.

CanWest's Canadian lenders have left the scene, and U.S. giants JPMorgan Chase & Co. and Morgan Stanley are providing a new $700-million package of loans that will help unsecured creditors buy the company for $1.1-billion, according to court filings. The new owners will also pump in $250-million of new equity and mezzanine debt, or loans that can be converted into stock.

Senior lenders, led by Bank of Nova Scotia, have controlled CanWest since the company filed for creditor protection in January, and will receive $925-million.

The classic leveraged buyout represents a challenge for a company that sank under the weight of its debts in the first place. CanWest will still emerge from its restructuring with proportionately more debt than rivals such as Torstar Corp.

"With much of the cash still earmarked for paying debt, there is no guarantee the papers will perform well," said one portfolio manager who used to own CanWest.

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The new owners are looking to rising ad revenues, a renewed emphasis on new media and traditional cost-cutting to boost returns and pay down debt. But while the newspaper industry has strengthened on the back of stronger-than-expected advertising in recent months, veteran executives are still grappling with the transition to the digital age.

That's the challenge the 46-paper chain will face now, said John Paton, the CEO of Pennsylvania-based Journal-Register Co., and an adviser to the new CanWest owners. "Newspapers as organizations have to think very aggressively and very differently about their business models ... Is there a holy grail in this? And of course the answer is, nobody has the answer," said Mr. Paton, who will sit on the board of the new company.

"You're trying bits and pieces that will lead us towards it ... it's all about finding a sustainable way of making sure that quality journalism survives."

Mr. Paton also recruited the company's new chief executive, Paul Godfrey, a veteran of the successful Sun Media buyout in the 1990s. Mr. Paton introduced Mr. Godfrey, 71, to the unsecured creditor group.

Mr. Godfrey is expected to move swiftly to pay down loans, and to list on the TSX as early as July.

He is backed by new owners who are all money managers with expertise in restructurings. The group is led by U.S. hedge fund GoldenTree Asset Management, a veteran player in distressed debt.

These funds have already made enormous gains on CanWest, buying the company's bank loans in the secondary market for as little as 30 cents on the dollar over the past six months - CIBC sold its loans, sources say. CanWest's unsecured bonds - there was $450-million of this debt outstanding - fetched just 10 cents on the dollar during the restructuring.

The decision to list CanWest on the TSX reflects the new owners' need to ensure the company is viewed as a Canadian by regulators, as that status ensures favourable tax treatment for all-important advertisers. Sources working with the new owners said while hedge funds that own CanWest will likely sell down their positions over time, the money managers will not head for the exits the moment the company begins to trade. CanWest shares were delisted from the TSX in October when the company filed for creditor protection.

Now all debts are to be paid, with the unsecured bonds converted into shares in the chain. The hedge funds hope to get one last boost from their investment by selling their equity stakes once the CanWest begins trading on the Toronto Stock Exchange as a pure play on newspapers that harkens back to the venerable Southam chain.

Canadian content in the new ownership group includes TD Asset Management Inc. and Invesco Trimark Ltd., both of which owned unsecured debt, according to court filings. Media companies must have domestic control. CanWest is contemplating a dual share structure, with multiple votes for Canadian investors and single votes for foreign investors, as a way to finesse federal ownership rules, according to sources working on the restructuring.

A cast of obscure hedge funds - Halbis Distressed Opportunities Master Fund, Alden Global Distressed Opportunities Fund, First Eagle Investment Management, 1798 Relative Master Fund, Seneca Capital Investments and OZ CW Investments - fill out the new ownership of the chain.