Secret pay raises anger lenders

February 25, 2009 at 12:00a.m.

PHILADELPHIA (AP) — The chief executive of Philadelphia’s two largest daily newspapers pledged Tuesday to roll back a $232,000 raise while his company tries to reorganize in bankruptcy court, but lenders questioned whether he is best able to run the debt-heavy business.

Philadelphia Newspapers LLC, which publishes The Philadelphia Inquirer and Philadelphia Daily News, filed for Chapter 11 bankruptcy protection Sunday, 21‚Ñ2 years after a group of local investors bought the company for more than $500 million.

Chief Executive Brian Tierney and other executives have insisted the company, while strangled by debt payments, remains profitable despite falling circulation and revenues. But some lenders balked at that analysis at Tuesday’s initial hearing on the bankruptcy petition and questioned decisions being made by Tierney, a former public relations executive.

“This is not a matter that is just about debt,” said lawyer Andrew Kassner, who represents Citizens Bank and other senior lenders.

Kassner lambasted the executives for secretly taking the raises while missing their financial goals. Tierney’s raise was disclosed in the bankruptcy filing; amid criticism, Tierney and other executives said through their lawyers in court that they will forgo the pay increases during the proceedings.

“I doubt that if there was an independent board of directors supervising this debtor, that would have happened,” Kassner said. “We want this company, this enterprise, to survive. But it cannot continue to be managed in the way it has been.”

A management consultant will be brought in, but, to the chagrin of the lenders, his role will be purely advisory.

The company earned $36 million by one accounting measure last year, a figure expected to be at least $25 million in 2009. But that’s before interest, taxes and other charges; the privately held company did not disclose its net income figures in the bankruptcy filing.

Although Kassner stopped short of calling for an immediate management change, he said lenders were “troubled by decisions that have been made” and questioned why the newspapers had to turn to bankruptcy court instead of negotiating a deal privately.

Tierney expressed surprise at their dissatisfaction, describing it as a “change of heart.”

“For the last several months and up until the moment we filed, they wanted me to stay and offered me a handsome compensation plan and a piece of the company — both verbally and in writing,” he said in a statement.

A bankruptcy judge Tuesday approved a plan to let the company continue to operate for the next two weeks, until a scheduled March 9 hearing, although she temporarily blocked a request to pay the company’s bankruptcy lawyers as much as $860 an hour during the period.