Tuesday, July 14, 2009

Why The Cubs Might Declare Bankruptcy

Upon arriving back in town from a sad, unexpected trip to California, news of the possibility of the Cubs making a Chapter 11 filing became front and center. Why would the Cubs do this?

Well, the main reason would be to allow the Cubs to break or revise certain contracts into which they have entered. Just look at GM's bankruptcy:

Once the world’s largest and most powerful automaker, new GM is now leaner, cleansed of massive debt and burdensome contracts that would have sunk it without federal loans.
Concessions made by the United Auto Workers union just before the company entered bankruptcy protection have brought GM’s labor costs down to where they are fully competitive with Toyota Motor Corp., Henderson said.

What contracts could the Cubs be trying to get out of?

Well, there are several that would be desirable. Alfonso Soriano's, Milton Bradley's and Aaron Miles's come to mind. Jim Hendry's wouldn't be bad to dump, either.

But, unfortunately, those aren't the contracts the Cubs are trying to get out of. Most likely the real reason is buried in paragraph 12 of a 15 paragraph article:

(T)he Cubs are a key Tribune Co. asset. And when the company was taken private in 2007, the company's subsidiaries, including the Cubs, provided a guarantee to its senior lenders. That guarantee connects the Cubs to Tribune Co.'s creditors.

What this means is, that in the event that the Tribune defaulted on debt obligations, the Trib's creditors would have access to the Cubs as a source of repayment for that debt. In more plain English, creditors could take the Cubs to help cover unpaid debts. Such a guarantee would not be canceled by a sale of the team.

Placing the Cubs through a bankruptcy would be a way to formally eliminate that guaranty. Once this occurs, no Trib creditor could argue in court that even a post-sale Cub franchise is still obligated to support ongoing Trib debt. The court would formally and legally eliminate the guaranty.

Sounds like a pretty smart move. For that one purpose. But letting a bankruptcy court get their mitts on a major league baseball trademark? The Chicago Cubs at the whim of a judge? Potentially very scary stuff.

Reader Aisle 424 reminds me of a fact that I was thinking about when I got the idea for this post but failed to include when I actually typed it.

Another contract that could possibly be canceled by the bankruptcy filing is the broadcast contract between WGN and the Cubs that was the subject of contention between the Ricketts and Same Zell a few weeks ago.

In actuality, this in not likely because the Cubs and the Trib could mutually cancel the contract without court assistance before the club is actually sold.

But, perhaps, having a court bless the contract termination is another benefit that the Ricketts (and Utay) would like to have to eliminate more potential post-sale SNAFUs.

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