2. CHAPTER 11 BANKRUPTCY FILING

Bankruptcy Petitions

On February 13, 2020 (“Petition Date”), McClatchy and each of our 53 wholly owned subsidiaries (collectively, the “Debtors”) filed voluntary petitions (“Chapter 11 Cases”) for reorganization under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”). The Chapter 11 Cases are being jointly administered under the caption In re: The McClatchy Company, et al., Case No. 20-10418.

Operation and Implications of the Bankruptcy Filing

We and our 30 local media companies continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. We intend to continue to operate our businesses in the ordinary course during the pendency of the Chapter 11 Cases until consummation of the proposed Asset Sale (as defined below), after which the Debtors intend to wind down in accordance with a plan of distribution.

In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to first-day and second day motions filed with the Bankruptcy Court, the Bankruptcy Court authorized us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to: (i) obtain debtor-in-possession financing, (ii) pay employee wages and benefits, (iii) fund customer and subscriber programs, (iv) pay vendors and suppliers in the ordinary course for all goods and services going forward, and (v) pay critical vendors, utilities, and taxes in the ordinary course.

Debtor-In-Possession Financing

To ensure sufficient liquidity throughout the Chapter 11 Cases, on February 13, 2020, we obtained $50.0 million of debtor-in-possession financing under a credit agreement (“DIP Credit Agreement”) from Encina Business Credit, LLC (“Encina”). This DIP Credit Agreement, coupled with our normal operating cash flows, is providing liquidity for McClatchy and all of our local news outlets to operate as usual and fulfill ongoing commitments to stakeholders.

The DIP Credit Agreement, which replaces our former asset based loan (“ABL”) revolver from Wells Fargo Bank, N.A. (“Wells Fargo”), provides for a secured debtor-in-possession credit facility (“DIP Facility”) consisting of a new revolving loan facility in the aggregate principal amount of up to $50.0 million, which will be in the form of revolving loans or, subject to a sub-limit of $3.5 million, in the form of letters of credit. Our obligations under the DIP Facility are and will be secured by all of our assets, whether now existing or hereafter acquired. The maturity date of the DIP Facility is no later than August 12, 2021. See Note 7 for further discussion of our debt.

Proposed Plan of Reorganization

Prior to and following the filing of the Chapter 11 Cases, we pursued approval of a proposed restructuring plan with our secured lenders, bondholders, and the Pension Benefit Guaranty Corporation (“PBGC”). We included lenders holding approximately 87% of our First Lien Notes in these confidential discussions. Unfortunately, we were unable to come to an agreement with our stakeholders and therefore, were unable to obtain approval from our creditors for the proposed restructuring plan at that time.

Asset Sale

On May 11, 2020, the Bankruptcy Court approved our motion for an auction process through which we were authorized to determine the highest or otherwise best offer for the sale of all or substantially all of our assets pursuant to Section 363 of the Bankruptcy Code or for sponsorship proposals with respect to a Chapter 11 plan of reorganization. The auction process concluded on July 10, 2020, and Chatham Asset Management LLC (“Chatham”) was identified as the successful bidder. On July 24, 2020, we entered into an Asset Purchase Agreement, by and among the Company, the Company subsidiaries listed on the signature pages thereto, SIJ Holdings, LLC (the “Purchaser”), and, solely for purposes of Sections 5.19 and 5.20, Chatham, and, solely for purposes of Section 8.3, Chatham Asset High Yield Master Fund, Ltd. (the “Asset Purchase Agreement”), pursuant to which the Purchaser has agreed to acquire substantially all of our assets for a purchase price of approximately $312.0 million, comprised of (i) a credit bid of our first lien notes of an aggregate principal amount of approximately $262.9 million and (ii) approximately $49.1 million in cash. On August 4, 2020, the Bankruptcy Court approved the Asset Purchase Agreement. The transaction contemplated by the Asset Purchase Agreement (the “Asset Sale”) remains subject to customary closing conditions, including Hart-Scott Rodino Antitrust Improvement Act of 1976 (“HSR Act”) approval, and is expected to close in September 2020. After the closing of the Asset Sale, the Debtors’ estates will wind down in accordance with a plan of distribution.

Reorganization Items, Net

We have incurred and will continue to incur significant costs associated with the reorganization, including costs such as debtor-in-possession financing, and legal and professional fees. The amount of these costs incurred since the Petition Date have been charged to expense and are expected to significantly affect our results of operations. These costs have been partially offset by non-cash gains on the write off of rejected operating leases and failed sale and leaseback financing obligations. In accordance with ASC 852, costs and gains associated with the bankruptcy proceedings since the Petition Date have been recorded as reorganization items, net, within our accompanying condensed consolidated statement of operations for the quarter and six months ended June 28, 2020.

Reorganization items incurred as a result of the Chapter 11 Cases are as follows:


	Quarter Ended		Six Months Ended
	June 28,		June 28,
(in thousands)	2020		2020
Professional fees	$	20,841	$	32,753
Write-off of unamortized deferred financing costs		—		83,040
DIP financing fees		(88)		—
Write-off of leasehold improvements on rejected leases		—		897
Provision for estimated damages on rejected leases		6,092		6,857
Net gains on write-off of rejected leases		(4,907)		(6,442)
Net gains on write-off of rejected failed sale-leaseback financing obligations		(10,902)		(10,902)
Losses on write-off of rejected executory contracts		1,012		1,012
Reorganization items, net	$	12,048	$	107,215

Professional fees include legal and financial advisor professional fees related to the Chapter 11 Cases. Write-off of unamortized deferred financing costs includes; (i) unamortized debt discounts, debt issuance costs, and fair market value adjustments for all tranches of debt except for the First Lien Notes as all other debt has been classified as liabilities subject to compromise at face value, and (ii) the cancellation of our ABL Credit Agreement (as described in Note 7). Provision for estimated damages relates to estimated claims by the lessors on rejected leases.

As of June 28, 2020, $24.9 million of the reorganization items, net, were unpaid and accrued in accounts payable in the accompanying condensed consolidated balance sheet.

Liabilities Subject to Compromise

As discussed above, since the Petition Date, we have been operating as debtor in possession under the jurisdiction of the Bankruptcy Court and in accordance with provisions of the Bankruptcy Code. The accompanying condensed consolidated balance sheet as of June 28, 2020, includes amounts classified as liabilities subject to compromise, which represent liabilities we anticipate will be allowed as claims in the Chapter 11 Cases. These amounts represent our current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases, and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. We will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material. These liabilities subject to compromise are not fully secured and have a possibility of not being repaid at the full claim amount.

Liabilities subject to compromise at June 28, 2020, consisted of the following:


	June 28,
(in thousands)	2020
Accounts payable	$	22,950
Accrued compensation		23
Other accrued liabilities		1,511
Other long-term liabilities		3,336
Accounts payable, accrued and other liabilities		27,820

Debt subject to compromise		440,418
Accrued interest on debt subject to compromise		18,112
Long-term debt and accrued interest		458,530

Pension and postretirement obligations		639,656
Liabilities subject to compromise	$	1,126,006

Determination of the value at which liabilities will ultimately be settled cannot be made until the Bankruptcy Court approves a sale of the Company’s assets and reconciliations are performed. We will continue to evaluate the amount and classification of our pre-petition liabilities. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of liabilities subject to compromise may change.