The McClatchy Company

To:  DC Secretary
 
Re:  Issue Number: 2020021301 (Bankruptcy Credit Event in respect of The McClatchy Company)
 
Date: February 14, 2020
 
Should the DC Resolve that the Auction with respect to The McClatchy Company be held at least 3 Business Days prior to the earliest date on which The McClatchy Company’s proposed plan of reorganization could be approved?
 
We refer to the Credit Derivatives Determinations Committee\'s (the “DC”) Resolution on February, 14, 2020 that a Bankruptcy Credit Event occurred with respect to The McClatchy Company (the “Company”) on February 13, 2020 and that an Auction should be held with respect to the Company.  Capitalized terms used but not defined herein shall have the meanings set forth in the 2014 ISDA Credit Derivatives Definitions (the “Definitions”), or otherwise in the 2018 ISDA Credit Derivatives Determinations Committee Rules (September 28, 2018 version) (the “DC Rules”).
 
In light of the DC’s Resolution described above, we believe the DC should Resolve to hold the Auction at least 3 Business Days prior to the earliest date on which the Company’s proposed plan of reorganization[1] (the “Plan”) could be approved (the “Proposed Auction Date”).  If the Auction is held after the Proposed Auction Date there is a substantial likelihood that a majority of the Deliverable Obligations that exist today, which would have been available to a Buyer if Physical Settlement had been the applicable Settlement Method, will no longer exist at the time of the Auction as a result of the Plan.  The deadline for creditors to vote on the Plan is currently February 24, 2020.  Although no date has yet been set for Plan confirmation, if the Plan is confirmed prior to settlement of the Auction, the settlement timeline for a Representative Auction-Settled Transaction formed in the Auction and the settlement timeline for a Relevant Transaction under Physical Settlement would produce materially different economic results, contrary to the commercial objectives of the Auction and prior determinations made by the DC.  Therefore, we believe that the DC should Resolve to hold the Auction in time for settlement to occur prior to approval of the Plan, which requires the Auction be held at least 3 Business Days prior to the prospective approval deadline.[2]
 
While the Proposed Auction Date may be earlier than is typical, it is necessary to hold an Auction promptly in this instance and the DC has the discretion to set the Auction Date by a Majority vote pursuant to Section 3.2(b) of the DC Rules.  Further, the DC has discretion to make amendments to the Credit Derivatives Auction Settlement Terms and/or Final List by Supermajority vote pursuant to Section 3.2(d) of the DC Rules in order to avoid or mitigate any prejudice that would result from the ability to settle in the Auction not being “broadly reflective of the Deliverable Obligations and ability to settle which would have been available [using] Physical Settlement[.]”[3]  The use of this discretion is also consistent with the past practice of the DC: when determining the relevant Auction Date in respect of iHeart Communications, Inc., the DC issued a meeting statement noting the following (emphasis added):
 
While not required to consider Section 3.2(d) of the DC Rules when setting the Auction Date, the DC noted that Section 3.2(d) sets out general principles that the DC considered relevant in the context of Auction determinations more generally. The DC determined that a chosen Auction Date should not cause prejudice to either Buyer or Seller under a Relevant Transaction as compared to such Buyer or Seller\'s ability to settle if Physical Settlement had been the applicable Settlement Method.[4]
 
The DC went on to conclude in the iHeart Statement that “the timeline for settlement of a Representative Auction-Settled Transaction formed in an Auction held on or after the Provisional Auction Date and the settlement timeline for a Relevant Transaction under Physical Settlement should produce substantially similar economic results[.]”[5]  In this case, “substantially similar economic results” will only be achieved if the Auction is held on or prior to the Proposed Auction Date.
 
Holding the Auction prior to the potential extinguishment of a majority of the existing Deliverable Obligations is also consistent with the commercial objectives of the drafters of the Definitions and the implementation of the Auction.  In reviewing whether certain loan obligations of Sears Roebuck Acceptance Corp. satisfied the Consent Required Loan Deliverable Obligation Characteristic, the External Review Panel that was convened to examine the question stated that:
 
the commercial objective [of the drafters of the Definitions] was to cast a wide net to ensure greater liquidity through greater deliverability in order to avoid situations where no deliverables were available and, therefore, a CDS protection buyer could not receive the benefit of its contract, and also to reflect a more complete view of the recovery rate of credit instruments issued by a particular borrower when settling the related CDS contracts.[6]
 
The concern identified in the Sears Decision is precisely the same type of concern present here, as the CDS contract will not function as intended if a majority of the Company’s Deliverable Obligations are extinguished prior to the Auction.  Accordingly, and for the reasons stated above, we believe that the DC should hold the Auction on or prior to the Proposed Auction Date.  Finally, to the extent that the DC agrees that this would be a correct application of the DC Rules and Definitions, we believe it would be helpful to the market as a matter of transparency for the DC to make an announcement to that effect.
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[1] See Form 8-K filed on February 13, 2020 by the Company, available at: https://www.sec.gov/Archives/edgar/data/1056087/000105608720000005/mni-20200212x8k.htm.

[2] We assume here that the Physical Settlement Period is 3 Business Days.  We note that the DC has discretion to determine a shorter Physical Settlement Period pursuant to Section 3.2(d) of the DC Rules (as further described herein) and believe that it should consider doing so in this instance.

[3] DC Rules, Section 3.2(d).

[4] Americas DC Meeting Statement dated January 6, 2017 (the “iHeart Statement”) at 1.

[5] iHeart Statement at 3.

[6] Decision and Analysis of the External Review Panel of the U.S. Determinations Committee DC Issue 2018101502 (Sears) (the “Sears Decision”) at 3.

SEC Form 8-K