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Jittery Emails in Tribune Bankruptcy Trial

WILMINGTON, Del. (CN) - One of the banks that financed the leveraged buyout of Tribune Co. might have known about the company's rapidly declining debt rating just after the deal closed, according to internal emails revealed Wednesday in the Tribune bankruptcy trial.

A credit specialist with JPMorgan Chase was shown to have grave concerns about Tribune's debt, by talking about a downgrade to the company's risk rating in the emails.

JPMorgan is one of the banks that helped finance the two-step leveraged buyout of the media giant, which owns the Los Angeles Times, the Chicago Tribune other newspapers and nearly a dozen television stations.

On this third day of the bankruptcy trial, Miriam Kulnis, credit specialist in JPMorgan's special credit unit, testified on behalf of Tribune.

She was cross-examined by an attorney for Aurelius Capital Management about the bank's risk rating for Tribune during the 2007 buyout.

The $8.2 billion deal was engineered by real estate tycoon Sam Zell.

Critics say the second step overleveraged Tribune and its debt ballooned to $13 billion, forcing it to file for bankruptcy in 2008.

In August 2010 a court-appointed examiner found that a trial court might view the second step of the buyout as a fraudulent transfer.

Kulnis said she became involved with the Tribune deal "before step two closed, sometime in November 2007."

One of her jobs, Kulnis said, was to assess the risk of JPMorgan Chase investments.

To achieve that goal, Kulnis said, the special credit unit applied an internal risk rating system which used a 1 through 10 system, with 1 being the best and 10 the worst. She said she did not recall what rating Tribune had when she was assigned to work on the Tribune deal.

The Aurelius attorney used one of JPMorgan's internal emails from Aug. 14, 2007, to remind her. Concerns about Tribune's rating emerge in that email.

In the message, Kulnis was asked by a JPMorgan employee to "please downgrade the ratings on Tribune from a 5 minus to a 6 plus."

At that point, the Aurelius attorney said, Kulnis should have known Tribune's risk rating.

In a later email, the day after step two of the buyout closed, Kulnis wrote: "I thought that a risk grade 7 was correct now that step two closed?"

In cross examination, the Aurelius attorney asked Kulnis: "Seven is a risk grade where you have to start reporting publicly about the debt, correct?"

Kulnis agreed.

Pushing further, the Aurelius attorney asked Kulnis to read a follow-up email in which she wrote, "you really think 7 is right with this much leverage and given you were debating solvency?"

Summing up, the Aurelius attorney asked: "Would seven be too good of a rating for this debt as of April 2007?"

After Judge Kevin Carey overruled an objection to the question, Kulnis answered: "It was a crazy time. A lot of stuff was going on. I don't really remember this downgrade or this discussion of a downgrade."

Bankruptcy Judge Kevin Carey is being asked to pick between two reorganization plans, one led by Tribune with endorsement by JPMorgan and other senior creditors, and the other led by Aurelius, with the backing of junior bondholders.

The trial will continue through next week.

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