Ion Media: When Junk = Junk

It seems like I've been missing out on a lot of news lately. Apparently, Ion Media issued its joint plan of reorganisation in relation to its Chapter 11 bankruptcy filing back in August. Where was I all this time? Correct answer: Bimbo Land.

Anyway, it does not look good for low priority bondholders of CUSIP 46205AAB9, such as myself.

Basically, they are proposing the following:

Class 1 Creditors will more or less receive the full amount of their claims in cash (page 22).

Class 2 Creditors will have the $150 million debt that Ion Media owes them exchanged for 62.5% of new equity in the reorganised Ion Media. This seems like a good deal for them in my opinion when you consider what the rest of the lower priority creditors get. Class 4 and Class 5 Creditors are funding this entire reorganisation (see below).

Class 3 Creditors receive a 37.5% share of equity.

Class 4 Creditors will receive warrants to purchase 5% of new common stock for $1 billion. If I did the math correctly, this means that anyone who exercises these warrants is effectively paying for the company as if it is worth $20 billion.

Class 5 Creditors will receive warrants to purchase 5% of new common stoc for $1.5 billion. Here, we are paying for the company as if it is worth $30 billion. LOL.

And according to Ion's own Web site, "all outstanding ION equity interests, including common stock, preferred stock and any options, warrants or rights to acquire any equity interests, will be cancelled and extinguished and holders thereof will not receive a distribution."

This is worse than my GBP/JPY trade from Friday!

Unless, for some odd reason Ion's new stock skyrockets and its market cap exceeds $30 billion. I wonder how old I'll be when that happens?

Doing the Right Thing: Ion Media Files for Chapter 11

Ion Media has obviously been dragging its feet around for too long and finally did the right thing by filing for Chapter 11. It had been postponing interest payments on a series of corporate bonds for as long as I can remember. In essence, it was not only cheating its bondholders, but also itself.

Whilst it was commendable that they tried to continue operating with all the financial burden they were going through, they should have just ripped the bandaid right off in the first place. Now, we've got to wait another 1.5 - 2 years to see how this all plays out. A hedge fund is implicated, so why do I get the suspicious feeling that there will be a lot of legal and financial hypocrisy ensuing in the near future?

I did only pay about $0.3 on the dollar for these bonds, but lament the fact that they're only subordinated notes.

People and companies should just do the right thing all the time. Whilst bankruptcy is not an especially honourable route to take, in this case, it was evident far back in Ion's timeline that it was probably the only unexhausted and realistic solution.

To those that feel that it is naive of me to expect junk bond issuers in general to actually pay interest as well as repay the principal at maturity (i.e. E*Trade), I would just like to point out a promise is a promise. Maybe it is naive of me, but it doesn't make defaulting any less wrong.