tribune sale jeopardized

i'm not going to pretend to be able to wade through every nuance of what may be happening here. but in general terms, this is what is happening.

the ongoing disaster in the mortgage market (if you're trying to sell your house, you know what i mean) is having some really important wider consequences. as banks and other major capital investors are now beginning to realize, many of the mortgage-backed securities and collateralized debt obligations with large holdings of mortgage debt they purchased in the last two years are perhaps not nearly as secure or valuable as they had once presumed. high default rates and widespread fraud have become serious issues. the recent event that seems to have driven this home is the failure of two hedge funds managed by investment bank bear stearns.

in the aftermath of the bear stearns disaster, many investment banks are re-evaluating their capital condition and finding that they want or need to raise lending standards. in part, they're doing this because investors further down the chain are demanding safer and/or more rewarding securities; in part, because they themselves have to manage their quality of capital investment. the result of this is that corporate interest rate spreads are rising all around the spectrum -- in short, problems in the mortgage market are apparently spreading into other areas of finance. this particularly includes leveraged buyouts.

when sam zell bought the trib, he did so with a small amount of equity and pile of debt -- a "leveraged buyout". investment banks offered something called a "bridge loan" to zell so he could make the purchase, with the debt later to be collateralized into bonds which are sold down the chain (at a profit) to investors that zell and tribune then have to pay back.

it's very important to note that these deals are conditional on the object being purchased having enough free cash flow to pay the interest and principal on that mountain of debt back to investors. the entire purchase is predicated on the stability of revenues and cash flow.

however, the newspaper business isn't going very well, and tribune's cash flow is rumored to be dropping like a stone.

in an environment where investment banks are becoming wary of bridge loans (for fear that they won't be able to sell the debt on at a profit because investors will demand more interest) and in several cases demanding repricing or killing deals, this is bad news for zell's deal. a nervous market has turned against it, with tribune's initial debt offering already trading underwater.

i won't pretend to know what will happen. it's possible the investment banks involved will try to kill the deal. it's possible zell will try to kill the deal. it's possible that the deal will be repriced and move forward. it's even possible that things will calm down and the deal go through as is. but, if you're interested in this kind of thing, just know that in this environment the deal is far from over.