Fine Print - July 2009

The value of moral obligations
By G.D. Gearino

Let’s do this Jeopardy!-style: I’ll give you the answer, and you craft your response in the form of a question. Ready? The category is “Things in Common,” and the answer is, “They recently offered a vivid demonstration of the difference between what’s legal and what’s right.” (Let’s spend 30 seconds humming the Final Jeopardy! theme — which, by the way, was composed by the late television talk-show host Merv Griffin as a lullaby for his son.) Done? Let’s see how you fared. The correct response: “Who are Mary Easley and The McClatchy Co.?”

Easley, of course, is North Carolina’s former first lady; McClatchy owns the two largest newspapers in the state. Of the two, she provided the highest-profile example of the gulf between legality and rightness. She was hired, while her husband was governor, to work for N.C. State University and eventually wound up with a $170,000 annual salary written into her five-year contract. The controversy led to the resignations of the chairman of the university’s board of trustees, its chancellor and its provost. A contract is a contract, of course, as any lawyer (like Easley and hubby Mike) can surely tell you. So let’s acknowledge that her contract was a legal obligation between the taxpaying citizens of North Carolina and their former first lady.

Problem is, both Easleys utterly failed in their moral obligation not to use their positions to dip shamelessly into the public trough. She never should have solicited a job with the state university system — because when the boss’s wife asks for work, only the bravest, or dumbest, middle manager is going to say no. Even after Easley’s hiring erupted into controversy, she tried to hang on to the job, declaring (through her lawyer) she would not resign and certainly not limp away in shame. On June 8, N.C. State decided to terminate Easley’s contract — thus setting up the possibility that she may file a lawsuit in the hope that one last grab of our tax dollars would ease the pain of having her sweetheart deal yanked away. It would all be legal, of course — and thoroughly wrong.

Then there’s McClatchy, the troubled and heavily indebted Sacramento, Calif.-based newspaper chain that decided a couple of months ago that the people who should bear the burden for management failure and economic misfortune are not its top executives, McClatchy family members or stockholders (the first two categories being heavily represented in the third). No, the people who should suffer most are those who lent McClatchy money in good faith and contributed nothing to its woes: the bondholders.

McClatchy, owner of The Charlotte Observer and the Raleigh News & Observer (where I worked until 2007), has asked the holders of $1.15 billion in bonds if they would like to swap those notes, which carry interest rates ranging from 4.625% to 7.15%, for new ones carrying a significantly higher rate: 15.75%. Lest you be impressed with McClatchy’s generosity, there are a couple of catches. The first is that in return for trading in more than a billion dollars’ worth of securities, the bondholders will get no more than $60 million in cash and $175 million of new bonds — meaning they’re being asked to accept as little as 18 cents on the dollar, depending on which notes they hold. The second catch is that bondholders who don’t accept that deal “will be structurally subordinated to the New Notes and all existing and future debt and liabilities,” as it says in the regulatory legalese. In plain English, that means McClatchy will screw the holdouts by putting them last in line to be paid.

Again, perfectly legal and perfectly loathsome — so much so that all three major credit rating agencies immediately downgraded McClatchy’s debt further into junk-bond territory, describing the move as “tantamount to a default” (Standard & Poor’s) and “coercive” (Fitch Ratings). But McClatchy’s stock price enjoyed a bounce, getting above $1 for the first time in four months. Better yet, the company could magically make as much as $500 million in debt simply disappear, according to analyst estimates.

So why is that a bad thing? Here’s why: There was no apparent pressing need for McClatchy to force a raw deal on its bondholders. In March, the company chirpily declared that recent efforts to control spending — cuts that cost some 1,600 employees their jobs — “are working [and] evidence of our cost reduction efforts can be found in our results.” Furthermore, when the company announced its first-quarter financials a month later, the critically important leverage ratio (debt divided by cash flow) was comfortably below the limit set by its lenders. Finally, McClatchy’s next scheduled bond payment was two years in the future. It’s one thing to arrive at 2011 and find yourself struggling to make a debt payment. It’s quite another to decide in 2009 that you just don’t want to pay people what you’re going to owe them later.

The whole move was clearly an effort to shore up McClatchy’s stock price. What it did, in essence, was socialize its current debt and privatize any future profits: McClatchy, a family-controlled company, has pushed the downside off to bondholders while preserving any future upside for its shareholders (which is to say, for itself). Remember this the next time the newspapers in Charlotte and Raleigh editorialize against corporate ruthlessness.