In re Granite Broadcasting Corp.

• Decision Date: 18 May 2007
• Docket Number: No. 06-12984(ALG).,06-12984(ALG).
• Citation: 369 B.R. 120
• Parties: In re GRANITE BROADCASTING CORP., et al.
• Court: U.S. Bankruptcy Court — Southern District of New York

369 B.R. 120

In re GRANITE BROADCASTING CORP., et al.

No. 06-12984(ALG).

United States Bankruptcy Court, S.D. New York.

May 18, 2007.

Akin Gump Strauss Hauer & Feld LLP, by Ira S. Dizengoff, Stephen M. Baldini, Phillip M. Abelson, New York, NY, for Debtors and Debtors in Possession.

Milbank, Tweed, Hadley & McCloy LLP, by Luc Despins, Andrew M. Leblanc, Brian Kinney, New York, NY, for Silver Point Capital Finance, LLC.

Ropes & Gray LLP, by Mark I. Bane, Robert S. Fischler, Anne H. Pak, New York, NY, for Harbinger Capital Partners Master Fund I, Ltd., et al.

Kelley Drye & Warren LLP, by James S. Carr, New York, NY, for Stuart Beck, et al.

Skadden, Arps, Slate, Meagher & Flom LLP, by J. Gregory St. Clair, New York, NY, for Blackport Capital Fund Ltd., et al.

Gibson, Dunn & Crutcher, LLP, by Jonathan M. Landers, Jessica I. Basil, New York, NY, for Twentieth Television and Twentieth Century Fox Film Corporation.

MEMORANDUM OF OPINION

ALLAN L. GROPPER, Bankruptcy. Judge.

Introduction

Granite Broadcasting Corporation and five of its wholly-owned subsidiaries (collectively, the "Debtors") filed for bankruptcy protection under chapter 11 of the Bankruptcy Code on December 11, 2006 (the "Petition Date").¹ The Debtors have moved for confirmation of their Modified First Amended Joint Plan of Reorganization, dated April 13, 2007 (the "Plan"). Silver Point Capital Finance, LLC ("Silver Point"), which holds approximately 80% of the Debtors' 9.75% Senior Secured Notes due 2010 (the "Secured Notes"), and all of the debt under its $70 million Credit and Guarantee Agreement, dated as of July 5, 2006 (the "Silver Point Credit Facility"), supports confirmation of the Plan, which is the result of prepetition negotiations between Silver Point and the Debtors. Confirmation is also supported by a group of institutions that hold approximately 15% of the Secured Notes.

Confirmation is opposed by Harbinger Capital Partners Master Fund I, Ltd., ("Harbinger"), Golden Tree Master Fund II, Ltd. ("Golden Tree"), and MFC Global Investment Management (U.S.), LLC (along with Harbinger and Golden Tree, the "Preferred Holders"), holders of over 50% of the Debtors 12.75% Cumulative Exchangeable Preferred Stock (the "Preferred Equity"). The Preferred Holders object to confirmation of the Plan on two grounds: (i) that the Plan is not proposed in good faith as required under § 1129(a)(3) of the Bankruptcy Code; and (ii) that the Plan undervalues the Debtors and pays the Secured Creditors more than the full amount of their claims, depriving the Preferred Equity of its appropriate recovery. For the following reasons, based on an extensive evidentiary record, the Court adopts the following findings of fact and conclusions of law and confirms the Plan.

Facts

The Debtors' Business and Corporate Structure

W. Don Cornwell ("Cornwell") and Stuart Beck founded Granite in 1988. Granite is a television broadcasting company operating in nine small-to-mid-sized markets in the United States, including Binghamton, NY, Fresno, CA, and Peoria, Ill., plus two large-market stations in Detroit and San Francisco.² Granite's network includes four NBC — affiliated stations, one ABC — affiliated station, two CBS-affiliated stations, and one independent station. The stations generally operate autonomously, although Granite has attempted to capitalize on synergies among stations in the same market or geographic region. Granite's corporate headquarters is in New York City. As the parent, Granite Broadcasting Corp. is responsible for global matters such as organizing sales programs and negotiating service contracts. Granite has 786 employees in total; 207 are employed by the Debtors. Granite is also one of the largest minority — controlled television broadcasting companies in the United States.

The Debtors' Capital Structure

The Debtors' capital structure is comprised of secured debt, a minimal amount of unsecured debt, and three classes of equity. On December 22, 2003, the Debtors completed an offering of $405 million of Secured Notes. The Secured Notes are secured by substantially all of the assets of the operating companies and by the stock of the license — owning companies. Interest on the Secured Notes is due biannually, on. June 1 and December 1. The Indenture for the Secured Notes contained covenants that, among other things, restricted the Debtors' right to incur additional debt and triggered holders' rights on a "change of control" event, and it also provided for a large prepayment premium if the Notes were repaid early. Silver Point holds approximately 80% of the Secured Notes, and a group of other holders, the largest of which is Blackport Capital Fund Ltd., holds approximately 15%. As will be discussed below, it was largely the Debtors' inability to make the $19.4 million interest payment on the Secured Notes in June 2006 that led to its financial crisis.

For reasons which will also be discussed below, Granite is a signatory to the Silver Point Credit Facility, dated July 5, 2006. Pursuant to this agreement, Silver Point provided $70 million of financing to Granite in two tranches. The Silver Point Credit Facility is secured by the same liens, pari passu, as the Secured Notes, as well as by a first lien on the assets of a station in Binghamton, New York that was purchased with the proceeds of that loan.

The Debtors have virtually no unsecured debt. The only substantial unsecured debts are a claim of Fox Network for damages resulting from termination of a long-term programming contract with the San Francisco station and a $3 million claim from Beck, in respect of severance and related employment rights. The claims of Beck and Fox have been liquidated in the Plan and will be paid in accordance with the parties' respective agreements.

Granite's equity is comprised of three classes of stock. The Class A common stock is owned by Cornwell and has sole voting authority. The Class B common stock consists of 19.8 million publicly-traded shares; members of Granite's board of directors own roughly 25%. The Preferred Equity is the third class and is comprised of approximately 200,376 shares of 12.75% cumulative exchangeable preferred stock. The Preferred Equity accrues a dividend of roughly $6.3 million per quarter, which has not been paid since October 2002. A majority of the Preferred Equity is held by the three Preferred Holders who have objected to confirmation. The holders of preferred stock were entitled to and did appoint two members to Granite's. Board upon Granite's failure to make certain dividend payments. Cornwell, as the sole holder of the voting common stock, appointed all the other members of Granite's Board of Director's (the "Board").

Granite has also guaranteed approximately $30 million of debt to the Malara Broadcast Group ("Malara"). Granite sold its wholly-owned subsidiary WPTA to Malara, at which time Malara also bought KDLH from New Vision Group. Granite then entered into a service contract with Malara, thus obtaining an important position in the Indiana and Minnesota markets. Malara funded its purchases with a credit facility, which Granite guaranteed by pledging roughly $30 million of U.S. bonds. Malara's financial statements are consolidated with Granite's for accounting purposes.

The Declining Financial Situation

Granite has sustained net operating losses for at least the past three years. It has attributed these losses in part to the two large-market stations in San Francisco and Detroit that were affiliated with the unsuccessful Warner Brothers Television Network (the "WB Network"), and also to several burdensome and expensive programming contracts. As early as 2003, Granite retained JPMorgan as its financial advisor to propose a restructuring of Granite's balance sheet and develop a new business plan. Granite also attempted to improve its position by entering into an agreement in September 2005 to sell the San Francisco and Detroit stations for approximately $180 million. This sale was aborted when Warner Brothers announced a plan to merge with United Paramount and in effect terminated the WB Network. This apparently violated covenants in the pending sale agreement and the purchaser chose not to close.³

When JPMorgan's retention agreement expired, Granite formed a committee to interview candidates to act as a new financial advisor. The committee (headed by Cornwell) interviewed several parties, and on March 13, 2006, Granite retained Houlihan Lokey Howard & Zukin ("Houlihan") as its financial advisor. The retention of Houlihan was supported by Eugene Davis, one of the directors appointed by the Preferred Holders. Houlihan was retained to help raise needed capital as well as to formulate a global restructuring of Granite's balance sheet. It was known at that point that Granite had only a limited time to raise the cash for the June 1, 2006 interest payment on the Secured Notes (the "June Interest Payment") and if feasible also to close on a contract to purchase a station in Binghamton, New York, that fit in well with its business plan.

In April 2006 Granite also formed a restructuring committee (the "Restructuring Committee") to work with counsel and Houlihan on restructuring issues. The Restructuring Committee was comprised of Davis, three other directors, and Cornwell. Later, Granite's Board of Directors determined that it needed to be directly involved with the restructuring, and the Restructuring Committee unofficially disbanded and the Board assumed its role.

Still desiring to sell the San Francisco and Detroit stations, Granite announced in or around May 2006 a contract to sell them to subsidiaries of DS Audible, LLC, for $150 million. The proceeds would have been more than sufficient to make the interest payment on the Secured Notes and fund the purchase of the Binghamton station. However, on June 7, 2006, one of the Preferred Holders, Harbinger, filed suit in the Delaware Chancery Court, seeking to block the...