FLS wins approval to continue operations
The Free Lance–Star Publishing Co. will be allowed to continue normal business operations as it restructures in bankruptcy court, a federal judge ruled Friday in Richmond.
U.S. Bankruptcy Judge Kevin R. Huennekens’ decision followed an at-times contentious four-hour hearing that featured testimony by FLS Publisher Nick Cadwallender about the company’s role in the community and its path to the Chapter 11 bankruptcy filing.
Cadwallender, who took over from longtime FLS Publisher Josiah P. Rowe III in 2011, told the judge that the company has been a key part of the local community for more than a century and said it was crucial for all parties involved that normal business operations continue. He said he has received an “outpouring of concern” from the community since the bankruptcy filing was publicly announced Thursday morning.
An attorney for Sandton Capital Partners, a New York City-based firm that is by far the FLS’ largest creditor and may end up owning the diversified media company, didn’t dispute that the company should be allowed to keep running its business and said Sandton plans to do that if it takes over following the bankruptcy case.
But the attorney, Jason Teele of the Lowenstein Sandler law firm, wanted more “adequate protection” from the FLS, which owes Sandton about $38 million stemming from a 2007 loan that the company took out to build the state-of-the-art Print Innovators plant on Belman Road.
When the FLS took out the $50.8 million loan from BB&T, it pledged as collateral almost all of its assets—including its real estate and earnings from its radio stations, Internet properties and newspaper. Rowe family members didn’t personally guarantee the loan.
Sandton bought the loan from BB&T last summer, probably at a discount to the $38 million remaining balance, and advised the FLS to file for bankruptcy.
Sandton and the FLS have a difference of opinions on whether the company’s radio towers in Caroline, Spotsylvania and Stafford counties should be considered collateral for the loan, according to arguments made Friday. As a result, the FLS decided not to walk “hand-in-hand” with Sandton into bankruptcy.
Teele made the case Friday that the radio towers were part of the company’s operation and that Sandton should therefore get a lien against the assets in exchange for allowing the FLS to use the cash the company has in the bank to pay its operating expenses.
Cadwallender said Sandton doesn’t have a claim on the radio towers or the revenue from them, and said he has a fiduciary responsibility to the company’s other creditors to keep those assets separate.
As an alternative, the FLS offered to pay Sandton $70,000 a month during the bankruptcy proceedings in exchange for access to its cash account.
Huennekens approved that offer, saying it represented “adequate protection” to Sandton and was a compromise that would allow the FLS to continue running its business and making all required payments to employees, vendors and more.
He also urged the two parties to come to a compromise, saying they already agree on most points and share the same goal: maximizing the value of the company and seeing it remain a going concern.
Cadwallender spoke Friday from the witness stand about how the FLS ended up in bankruptcy court.
He said the company—then under the leadership of Rowe, his father-in-law—decided to build the commercial printing plant as a way to diversify its revenue stream. The company had been approached by newspapers such as The Wall Street Journal and New York Times to print regional editions, and wasn’t able to do so because of the limited capacity of its older printing press.
“Mr. Rowe felt it was a tremendous opportunity,” Cadwallender said.
The FLS invested about $65 million in the plant, Cadwallender said, borrowing about $50.8 million and putting in the rest itself. He said it is one of the most sophisticated printing presses in the world.
But soon after the plant was built, the worst recession since the Great Depression arrived and a trend toward people getting their news online sapped circulation and advertising revenue. Print Innovators was also hit hard when its largest customer, the Washington Examiner, ceased its print product last summer.
Though the company never missed a payment on its loan from BB&T, it fell out of compliance with “covenants” of the loan agreement governing the required ratio between debt and earnings. That forced the FLS to pay a hefty penalty to BB&T in addition to its regular payments.
Rowe invested $1.9 million of his personal money into the company to try to get it back into compliance, Cadwallender said.
In the meantime, the company trimmed its workforce by a third, brought in consultants to work on a turnaround and launched a variety of new products. But in the end, the company was unable to get back into compliance with the loan or find alternative financing or a buyer at a price acceptable to BB&T.
BB&T eventually decided to sell the loan to Sandton, which quickly urged Cadwallender to file for Chapter 11. Aware of the looming filing, several senior executives decided to leave the company after Sandton purchased the loan.
Cadwallender said Sandton officials told him they wanted to continue to see the business operate, and to keep management in place. With no better option and wanting to see the business continue, the FLS decided to file the bankruptcy petition.
The Rowe family likely won’t have any ownership stake following the bankruptcy case.
Cadwallender said he doesn’t begrudge BB&T’s decision to sell the loan, noting that the bank was forced to reserve capital to hold the loan on its books due to federal banking regulations. The FLS continues to bank with BB&T.
Sandton is the FLS’ only secured creditor, but the company does have a number of unsecured creditors. Most of them have small claims that the FLS planned to pay shortly after getting approval to continue running its business as a debtor in possession.
The largest unsecured creditor is the Pension Benefit Guaranty Corp., a federal agency that may end up taking over the company’s pension plan. The plan is currently underfunded by about $5.3 million, according to the bankruptcy petition.
Cadwallender said the fund has about 85 percent of what it needs to be considered fully funded. At one time, the underfunded total was more than double its current level, but gains in the stock market have closed the gap.
Assuming the PBGC does take over the pension plan, just about all FLS employees will continue to receive their full expected benefits. The PBGC does cap its maximum payout per individual, but only a few former upper-level FLS employees are expected to be affected by that.
Another hearing in the case is scheduled Feb. 27 in Richmond, followed the next day by a meeting of creditors.
Bill Freehling: 540/374-5424