Citigroup and Ryan Kavanaugh’s Relativity Media exchanged lawsuits Wednesday over Citi’s attempt to renegotiate terms of their five-year slate financing deal involving Sony Pictures Entertainment.
The legal fight is the latest byproduct of a worsening financial picture both globally and in Hollywood. The Dow fell for a third straight day, shedding 411 points. Citigroup is at the eye of the storm in the media and entertainment sector, which is one reason its shares dropped nearly 11% to $9.64, their lowest level in 13 years.
A massive round of layoffs — said to be several thousand — is widely rumored to be imminent at Citigroup. The bank said only that layoffs will continue “through year-end” and gave no confirmation on the exact number.
Many other large institutions are also struggling under the weight of paper that has become more and more difficult to turn into profit. “Given their problems, no boutique asset class is worth their time anymore, so they will do anything to try to get out without losing their shirts,” said one architect of several slate deals.
Separately Wednesday, Citi confirmed it has cut ties with Continental Entertainment Group. The finance and production outfit is involved in such efforts as Wild Bunch pics, the Weinstein Co.’s Asia Fund and forthcoming Lionsgate release “The Spirit.” Citigroup was its majority owner and provided a revolving credit facility and capital for new-issue companies.
Sources with knowledge of Continental said Benjamin Waisbren, a former bankruptcy lawyer and corporate restructuring specialist who has run the company since its 2007 inception, will keep it going. Continental will shift its focus away from film finance and toward advising distressed companies, especially those in the film biz.
At the heart of Relativity’s suit, filed in U.S. District Court in Manhattan, is Relativity’s charge that Citigroup tried to restructure terms of their 2007 Beverly I deal, resulting in a higher interest rate for Relativity’s revolving credit. Citigroup informed Relativity of its intent to charge a higher interest rate for the credit line in a letter sent Oct. 6.
At issue in the suits is loan syndication, the practice of reselling debt to other institutions and investors that helped fuel the growth of slate financing (and other financial products) earlier this decade. In the past year, the frozen credit markets have made the tactic all but impossible, leaving large institutions no choice but to exit the biz altogether, as Deutsche Bank and Societe General have done, or try to renegotiate their positions.
“This is hardly an isolated incident,” said Relativity attorney Eric George. “The same bankers are being sued in a myriad of actions for practicing a fraud on the public at large, with various subprime loans…. These types of banking practices have, by comparison, raised the public’s esteem for used car salesmen and politicians.”
Citigroup, which ripped Relativity’s suit as “totally without merit,” countersued later Wednesday. Its complaint alleges it “reserved the right, subject to certain limitations, to change all or any of the terms, structure, tenor or pricing of any of the facilities if such changes were needed, in Citigroup’s sole judgment, to ensure that the facilities are successfully syndicated.”
Relativity and Citigroup struck their agreement in a completely different era. It launched in January 2007, giving Relativity the funds to co-finance 45 Sony films, including “You Don’t Mess With the Zohan” and Roland Emmerich disaster epic “2012.”
Although Sony is not involved in the legal action, an insider said the studio will likely join Relativity’s bid to recoup potential losses. A Sony rep said the studio had no comment on the litigation, adding only that “contractually, the financing of our films is secure.”
The suits will likely be tied up in the courts for years, but the court battle won’t affect Relativity’s ability to draw coin from Citigroup. Relativity alleges that Citigroup’s breach of the original deal terms will result in at least $50 million in damages, though a source pegged the true cost at closer to $35 million a year over the five-year period, or $175 million.
“Film is an asset class that is truly in distress,” said one battle-scarred dealmaker. “Even if I had access to a billion dollars, there would be better things to do out there than expose that capital to the risks of the film business.”