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Since Canso's loan is a first-lien note, the company will be repaid first if any restructuring takes place.Adrian Wy

Two months into a strategic review, it's become clear there's no white knight coming to save the day at debt-laden Postmedia. The fate of the country's largest newspaper chain will be decided in a showdown between its two major creditors, a rough-and-tumble New York-based distressed debt investor and a 15-employee bond fund from the Toronto suburbs.

Here's the spoiler alert on how any faceoff would end: The Canadians will win. However, with creditors owed $668-million and the media company's advertising revenues in freefall, there's an expectation that everyone with a financial stake in Postmedia will take a haircut as the company adapts its balance sheet to its diminished circumstances.

Postmedia's financial woes are easy to spot: The owner of the dominant newspapers in most Canadian cities borrows money at the corporate equivalent of payday loan rates. After a trip through creditor protection in 2010, Postmedia ended up financed with a $363-million U.S.-dollar-denominated note that pays 12.5-per-cent interest from Goldentree Asset Management.

Goldentree bills itself as one of the world's largest credit investors, along with a $313-million (Canadian) loan at 8.25 per cent from Canso Investment Counsel, based in that noted financial hotbed of Richmond Hill, Ont.

Postmedia has slashed costs to keep the printing presses running and make interest payments. But advertisers' well-documented shift away from print publications – the company's ad revenue was down 18 per cent in the most recent quarter from the previous year – means the debt grows increasingly difficult to service. In the quarter, Postmedia's operating income was $12.7-million, excluding various costs such as depreciation and restructuring; cash interest payments were $23.5-million.

In early April, Postmedia announced that independent members of the board were "exploring and reviewing alternatives to improve its operations, capital structure and liquidity." A spokesperson for Postmedia said Monday the company has no further comment on the process.

However, sources working for potential investors say traditional media firms such as Torstar and Glacier Media have passed on the opportunity to buy into Postmedia, as have private equity funds. With no new investors coming in, it will be up to the existing creditors, Goldentree and Canso, to fix what ails Postmedia.

The best-case scenario for Postmedia is a quick, clean restructuring that allows the media company to lower debt and devote resources to reinventing its business.

But dust-up is more likely. Sources familiar with Postmedia's credit structure say Goldentree's loan stands to be totally wiped out if the company restructures through a filing for creditor protection, while Canso enjoys a far stronger position. To even partly recoup its investment, there's speculation Goldentree will push for concessions from its fellow creditor.

It's tempting to paint any conflict between Postmedia lenders in David-vs.-Goliath terms. With more than 200 employees and $24-billion (U.S.) of assets, Goldentree is 10 times the size of Canso and sports a reputation for winning distressed debt fights. But pedigree and assets don't decide restructurings – covenants and seniority do. And Canso is at the top of the Postmedia credit stack.

Canso's loan to Postmedia is what's known as a first-lien note, while Goldentree's debenture is clearly labelled as second-lien. In any restructuring, first-lien lenders must be paid before the next tier of creditors can cash out.

In addition, Postmedia's first-lien notes boast a clause that dictates every time the company sells an asset such as a former printing plant for $10-million (Canadian) or more, the money goes to pay down debt owed to Canso. Postmedia is shedding real estate to raise capital, and that provision meant the company sent $16.3-million to the first-lien note holders over the past six months.

If Goldentree grows weary of watching cash from Postmedia asset sales go to the first-lien note holders, or the company's financial results continue to deteriorate, the U.S. fund would have reason to push for a restructuring that favours its interests. As it stands, the first-lien notes are scheduled to be repaid in August, 2017, while Goldentree's debt is due in 2018. Executives for Goldentree and Canso were not available to comment on Postmedia.

Canso is known for contrarian investing and has invested profitably in a number of restructurings over its 19-year history. Founder John Carswell, a former Canadian air force navigator who still sports a military crew cut, named the fund after the twin-engine amphibious planes that his father flew and stresses in his letters to investors that the culture of Canso shares the aircraft's reputation for "ruggedness, endurance and flexibility." All those characteristics are likely to be on display at Postmedia.