Relativity Scrambling to Find Long-Term Fix to Debt Crisis

Failing to pay off a massive debt load that came due Thursday, Relativity is still scrambling to find a long-term fix to a financial crisis that’s left its future in limbo and company morale at a low point.

Tensions are high among rank-and-file employees, sources tell Variety, who are concerned that the studio will soon be plunged into Chapter 11. Relativity’s leadership is claiming that a solution is near and that it will soon be able to find new investors to help refinance its debt.

“We are close to concluding an overall deal with our lenders and new equity partners which will position the company for long-term growth,” the studio’s statement said, providing no details. “We are highly confident in the company’s future.”

It’s unclear if the studio has been granted a temporary reprieve on the $350 million that was due this week. An insider claimed that some kind of an extension had been reached but shot down a report elsewhere that stated Relativity had received a 10-day stay from its lenders.

The bottom line is Relativity has its back up against the wall as it potentially faces a future without founder Ryan Kavanaugh. If Relativity does not come up with the money to satisfy a group of lenders that includes Colbeck Capital, it could be forced into bankruptcy.

In May, the company received a monthlong extension to try to find new financiers or to come up with money to pay off its lenders.

Kavanaugh has been trying to convince lenders to agree to an “amend and extend” that would push back the debt deadline back by a year. He would use that time to refinance the debt or bring in additional equity investors to repay lenders. At the same time, the Relativity leader is looking to attract outside investors to pay off debt holders who are wary of offering him more time and want their money back.

The mood among staffers at Relativity is described by sources as somber, with many worried that Kavanaugh will be unable to devise a solution to the company’s financial problems, leaving them without jobs. Vendors are also agitating to get paid, peppering employees with calls and emails about unpaid bills.

At one point, STX Entertainment had examined the possibility of buying domestic rights for two Relativity films, “Hunter Killer” and a reboot of “The Crow,” but in a statement, Relativity said it was not exploring the sale of any of its movies.

Analysts say that Relativity’s very public debt crisis could scare away certain investors.

“There’s a perception problem,” said Hal Vogel, a veteran media analyst. “You’re not going to write it off and say never, never, it’s impossible to come back, but generally the game gets tougher.”

One problem is that interest rates are expected to get higher in the coming years, putting an end to the kind of “cheap money” that’s made it easier to borrow capital. If the Federal Reserve hikes interest rates, that could be difficult for companies like Relativity.

“The bar for profitability just gets higher,” said Vogel. “It raises the cost of doing business.”

Relativity’s box office misses, such as the Liam Hemsworth thriller “Paranoia” and the Christian Bale drama “Out of the Furnace,” outnumber hits like “Limitless.” Its headaches also expose the difficulties that independent studios face in competing with major players like Warner Bros., Disney and Paramount that are all small parts of sprawling media and entertainment enterprises.

“It’s a reminder of how uncertain these investments are and how challenging they are,” said Jason Squire, a professor at USC’s School of Cinematic Arts. “Companies this size don’t have the protections that major studios have to offset losses when they face major headwinds.”

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