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Relativity’s Post-Bankruptcy Era Could Be Fraught, Experts Predict

Relativity Media insiders and allies of Ryan Kavanaugh are hoping the founder/CEO will remain in charge of the company amid an orderly reorganization. But those familiar with the state of the studio and with previous Chapter 11 cases warn: the coming months will be anything but tame.

Kavanaugh takes the position that the business he founded 11 years ago remains solid, if it can just be relieved of excess debt, said sources familiar with his thinking. Relativity can be stabilized and rebuilt, particularly relying on revenue from its lucrative TV production unit and subsidiaries like Relativity Sports –the agency (of which it owns just 30%) that provides representation to pro athletes, these people said.

But outsiders who have studied Relativity said they believe a contentious and protracted battle will be waged over the company and its diminished assets. Rather than a steady reconstruction, they expect Relativity’s senior debt holders to move to take control of the mini-studio, perhaps so they can auction it off in pieces.  Those debt holders — who reportedly include Anchorage Capital, Falcon Investments, Colbeck Capital and others — stand first in line to recoup millions of dollars of investment.

But junior lenders and a long line of vendors, who could be in danger of collecting little or nothing, might fight to get back some of their money, said the experts, who declined to be named discussing confidential conversations with lenders and other creditors.  In the event that Relativity’s assets are not substantial enough to cover second- and third-tier creditors, their best alternative may be to attempt to stall a final settlement, said one individual following Relativity’s finances closely.

The prospect of prolonged litigation and spiraling legal and advisory fees could create enough uncertainty for the lower-ranking creditors to force a settlement for a part of what they are owed, said the individual.

The excruciating process could spur multiple lawsuits between creditors and the company, with Relativity’s board of directors potentially a target of litigation, said two individuals who have tracked both  Relativity and previous bankruptcies involving entertainment concerns. The process could last anywhere from sixty days to two years, experts said.

Kavanaugh declined to comment, said a spokesman. Relativity offered no formal response on Wednesday, the same day that 75 of the company’s 350 employees received layoff notices. The pink-slipping was viewed both inside and outside the company as a final precursor to a Chapter 11 filing.

The process could leave Kavanaugh, 40, and other equity investors — believed to include OneWest Bank Group founder Steven Mnuchin — the poorer.

“There is a pecking order in bankruptcy cases and at the bottom of the rung is equity,” said Brian Davidoff, an attorney at Greenberg Glusker who worked on the Chapter 11 filing of visual effects company Rhythm & Hues. “The ability of ownership, which is presumably Ryan Kavanaugh in a substantial part, to hold on to the company is subject to those senior creditors being paid.”

In recent Hollywood history, there are two likely paths that Relativity could follow. Those close to the company’s current management are hoping for a scenario akin to that faced by Metro-Goldwyn-Mayer, which shed more than $4 billion in debt to exit Chapter 11 in 2010. It went on to back more James Bond and “Hobbit films.”

Much less savory is an outcome more like the one that befell Rhythm & Hues. The Oscar-winning effects house had to be sold at auction for just pennies on the dollar in 2013. 

Serious questions have been raised about the current value of Relativity, which Kavanaugh had long hoped to build into a multi-million dollar enterprise. The company’s film unit has struggled, but does have several pictures that are completed or ready for pre-production, along with a limited library.

Its television division and partial interest in the sports agency remain among the company’s most valuable holdings. And creditor Colbeck Capital is bullish on Relativity’s education operations. For now, though, the true worth of those business units is purely speculative, as is how effectively they can be monetized to pay down the roughly $320 million in debt that’s outstanding.

“Until they file for bankruptcy, it’s hard to know who they owe and what their assets are,” said Steven Azarbad, chief investment officer in Maglan Capital and an investor in MGM. “How many movies are in their film library, what their slate looks like going forward, how strong their TV earnings are. There’s no clear cut answer to any distressed situation.”

Given that many of the lenders hail from the world of private equity, Davidoff is one of those who believes a sale is a more likely option than a restructuring.

“In today’s world among many of these funds you have people hunting around for good deals in distressed companies,” said Davidoff. “They’re very sophisticated, they put a lot of money in as debt financing and they want the company sold. And they’ll exert a lot of pressure to put the company up for sale.”

When it comes to entertainment companies, one group is most likely to be made whole before all the others — the Hollywood unions for screenwriters, directors, and actors. They have lien rights on pictures like “Masterminds” or “Kidnap” that Relativity has yet to release, and if the studio’s creditors want to sell those assets in order to get paid, they will need to strike a deal with the various guilds first.”The guilds are going to have a big say,” said Davidoff. “They want to make sure that their folks are paid.”

 

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