UPDATE 1-Funds seek repayment of Tribune debt over Cubs sale

(Adds background, updates bond price)

NEW YORK, June 7 (Reuters) - Hedge funds want immediate repayment of a $1.26 billion Tribune Co. TRB.N bond issue, contending Sam Zell's plans to sell the Chicago Cubs after he acquires the publisher amounts to a default.

Three unidentified funds, which own 55 percent of the series, sent default notices to Tribune in April, saying a sale of the Cubs baseball team would violate the bond's convenants, according to a June 1 filing with the Securities and Exchange Commission. If a default were declared and upheld, holders of the 2 percent convertible issue due May 2029 would be entitled to be repaid immediately at full value.

Tribune is contesting the default, it said in the filing.

Should the funds prevail in their bid, they could capture a fast profit.

The bonds, which are listed on the New York Stock Exchange under the ticker "TXA" TXA.N, last traded at $68.03, or about 43 percent of their redemption value of at least $157 each. That indicates a market value of the amount held by the three funds of about $298 million.

The bonds had earlier reached a high in composite trading of $68.75, a three-month high.

An affirmed default would trigger repayment at redemption value, which would ring up a $395 million windfall for the three holders. The face value of their holdings totals about $693 million at Thursday's latest quoted price.

Tribune, publisher of the Chicago Tribune and Los Angeles Times newspapers, agreed earlier this year to go private in an $8.2 billion transaction backed by Zell, the Chicago real-estate magnate. After the 2007 Major League Baseball season, Zell plans to sell the Cubs and some other assets.

The bonds, which go under the name PHONES, are tied to a block of Time Warner Inc. (TWX.N) shares acquired by Tribune.

Having a company declared in default for violating a covenant is "the ultimate home run" for bondholders, said Paul Berkman, convertible securities analyst at J. Giordano Securities in New York.

Bondholders, particularly hedge funds, have tried that tactic often in the stock options scandal on companies that were late filing financial reports, he said.

"On rare occasions they get paid off at par, but more often they get paid to go away," he said. "Either way it's kind of a quick bonus."

Bondholders also extracted value from Equity Office Properties Trust EOP.N, which boosted the price it paid to redeem debt after bondholders rejected the company's first offer. The real estate investment trust was redeeming its bonds to clear the way for its acquisition by Blackstone Group.

Tyco International Ltd.'s (TYC.N) bondholders also opposed a tender offer for their bonds, saying it was below what they viewed as the full value of their debt. Tyco was attempting to buy back debt as part of its spin-off of its electronics and health care divisions into independent companies. (Additional reporting by Dena Aubin)