A Toronto-based private equity firm has agreed to bail out cash-strapped Relativity Media, according to a source familiar with the arrangement, though it remains unclear how the entertainment company will satisfy other creditors so that it can lay its financial challenges to rest.
Catalyst Capital Group, which specializes in distressed and undervalued companies, has acquired all of Relativity’s senior secured debt of $150 million, said an individual familiar with the deal, who declined to be named. The Canadian investment firm reportedly has agreed to extend for one year a debt repayment requirement facing Relativity.
A spokesman for Catalyst did not return repeated phone calls, but the source said the investment company also had agreed to pump an additional $170 million of equity into Relativity to help stabilize the film and TV producer and position it for future growth. Following the arrangement, Relativity founder and CEO Ryan Kavanaugh reportedly will maintain his post, while the Toronto investment company will take a seat on Relativity’s board.
The agreement leaves Kavanaugh and his company in negotiations with a number of other investors who hold subordinated loans with Relativity. Among the companies awaiting repayment is New York-based Colbeck Capital. Colbeck’s conflict with Relativity became public in late May, with the entertainment company accusing the investors of spreading false rumors of financial instability in an attempt to take over Relativity.
The source who described the deal with Catalyst on Monday said he expects Colbeck and other creditors to also agree to one-year extensions, thereby giving Relativity more time to reorganize and strengthen its position.
With both Catalyst and Kavanaugh not speaking about the new financial arrangement, it is impossible to assess its impact on the company, which made “The Fighter,” “Three Days to Kill,” “The Best of Me,” among dozens of other films.
Analysts said, however, that companies that take on new investors to bail out old ones generally face more onerous terms with each succeeding deal. One expert who follows Hollywood entertainment companies closely likened Relativity’s situation to the one currently roiling Greece. In order to pay down debts, the debtor requires more capital, but the cost of that capital becomes increasingly expensive, deepening the hole.
“It’s an adverse cycle,” said Hal Vogel, a veteran media analyst. “If you failed to throw off sufficient cash flow at a lower interest rate, it gets harder and harder to get ships steering on a straight course.”
Relativity has not backed down from its plan to make an initial public stock offering in 2016, but its very public lending struggles make such a development more challenging.
Kavanaugh has said his company — which also includes a sports agency — does not need to produce blockbuster films to make solid profits. Rather than these “home runs,” the Relativity boss said his company knocks out singles and doubles, with a high-enough profit margin to benefit over the long term. Still, a breakout film or two would go a long way toward stabilizing Relativity, where employees are said to be troubled by the repeated reports of financial difficulties.
The company’s current slate includes the oft-delayed remake of “The Crow” and the Zach Galifianakis comedy “Masterminds.”
“If the markets are friendly and the forthcoming projects are sufficiently of interest [an IPO] could happen, but it’s a low probability,” said Vogel. “There has to be some kind of future growth pattern that’s visible to perspective investors.”