L.A. investment bank saw Tribune's financial woes

Houlihan Lokey refused to give the parent company of the LAT a clean bill of health in 2007, concluding that the leveraged buyout by Sam Zell would have left Tribune with too much debt, the WSJ reports. Tribune then turned to a smaller firm called Valuation Research, which signed off on the deal. All this is coming up because a bankruptcy-court examiner has criticized Valuation for using faulty methods in reaching its conclusions.

Solvency opinions often are sought by corporate boards or lenders to provide comfort that a company can handle the obligations incurred in a leveraged deal. Lenders, in particular, want to be assured their investments will be safe from litigation in the event the company seeks bankruptcy protection. In highly leveraged deals such as Tribune's, these opinions are sometimes required for the transaction to close. Tribune needed solvency opinions to complete Mr. Zell's buyout. Houlihan was concerned about Tribune's financial health to begin with, but also the declining fortunes of the newspaper industry, one of the people said. Houlihan viewed Mr. Zell's deal as "DOA" and felt it was "going to fail," this person said.

The finding by the court examiner could affect Tribune's efforts to get out of bankruptcy protection. Some creditors believe that the buyout constituted a "fraudulent transfer" and should wipe out recoveries for banks that backed the deal.