Relativity’s Ryan Kavanaugh Launches Another Salvo Amid Latest Investor Change

Relativity's Ryan Kavanaugh Reacts to Latest
Mark Davis/Getty Images

Just 10 days after a Canadian investment firm emerged as the possible financial savior of Relativity Media, the investor has been bought out by a New York financial house that now holds a substantial share of the entertainment company’s senior debt, according to Relativity CEO Ryan Kavanaugh.

The whipsaw changes in Relativity’s financial outlook come as creditors have become a regular presence at the entertainment firm’s Beverly Hills offices. Some of those owed money by Kavanaugh’s 11-year-old company have now raised the possibility of conducting a forensic audit to determine what has become of millions of dollars in investment.

As the crisis unfolded over a period of weeks, Kavanaugh remained publicly silent, but for the second time in less than 24 hours, he lashed out at the press on Thursday, suggesting that all the fretting about Relativity is misguided, at best, or part of a “malicious witch-hunt.” He described for the first time how one distressed equity investor, Toronto-based Catalyst Capital, put $130 million into Relativity, only to have long-term investor Anchorage Capital and others exercise an option to buy out Catalyst.

“Relativity’s current lenders, including Anchorage, decided that it was in the company’s best interest for them and others to own all of the senior debt versus having one group own such a large stake,” Kavanaugh said. Anchorage declined to comment. The firm says on its website that it has a “particular focus on defaulted and leveraged issuers.”

The new arrangement does not clear away the web of creditors or complications that continue to confront Relativity and its founder, the 40-year-old Kavanaugh. Representatives of those hoping to be made whole by the company gathered at the embattled studio’s office on Wednesday, as creditors have frequently done in recent weeks. They came on the day that Kavanaugh was targeted with a $7.5 million lawsuit by a promotional lender that helps Relativity pay to release its films.

Concerns were expressed in the suit about the use of funds invested in the company, including P&A on specific Relativity releases. Those worries have led to the suggestion by some lenders that it might be time for an audit, according to two knowledgeable sources. Relativity declined to comment on that possibility, but another person close to the company insisted: “There is no audit.” That individual also said visits from creditors and others should not be a surprise given that Relativity has acknowledged it is trying to devise a new financial plan.

Relativity confronts yet another challenge after it previously pushed back by several months the release of its horror film “Before I Wake” and the comedies “The Bronze” and “Masterminds.” Those delays were ordered because there is not enough money to market and distribute these pictures. A postponement of the September start for Natalie Portman’s “Jane Got a Gun” is also likely.

But what aids Relativity on one side of the balance sheet hurts it on the other, exacerbating its cash flow problems. That’s because various foreign output deals and home entertainment pacts are triggered by a picture’s theatrical release.

One of Relativity’s recent releases, “Desert Dancer,” opened in April and grossed a paltry $333,457 on a $6 million budget. It has fielded three other pictures this year — “Woman in Black: Angel of Death,” “Black or White” and “The Lazarus Effect” — to mixed results. One person close to the company said Relativity continues to receive income from other sources, particularly its television and agency arms.

The $7.5 million lawsuit by RKA Film Financing also is problematic for Kavanaugh, bankruptcy experts say, because it could inspire other suits by unsecured creditors that are hoping to recoup their money. Filing suit could push those companies to the front of the line in any recovery process.

“They want to avoid a race to the courthouse,” said Jennifer Nassiri, a bankruptcy attorney at Venable.

Nassiri is not working with Relativity or its creditors, but she said companies in this situation will file for Chapter 11 if they believe that dealing with an array of legal challenges is too expensive. The only downside is that bankruptcy itself can be a very costly proposition involving potentially millions of dollars in attorney fees.

“Chapter 11 is a great tool to stop everything in its tracks,” said Nassiri. “The purpose is to give a debtor breathing room to determine what the best strategy is for reorganization.”

Kavanaugh, however, has shown no sign that he is ready to file for court protection.

“Our lenders have been very cooperative and have been working closely with us to ensure that Relativity continues to move forward, grow and execute our business plan,” Kavanaugh said as part of his statement today.

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  1. cy12 (@cy12) says:

    So, His super intelligent proprietary algorithms which supposedly allow him to predict which type of films will be profitable and which type of scripts he should develop, don’t seem to be woring that well…

  2. EK says:

    The real endangered species here is the Relativity staff. Bankruptcy, if it happens, may protect Kavanaugh from his debt collectors but it will only exacerbate the job insecurity of Relativity’s personnel on all levels. Subsidiaries, like sports and TV, while doing well in their own rights, could also be effected. All in all, there does not appear be an all-embracing solution to the movie company’s situation, which continues to be imperiled by its leader who just plain makes people uncomfortable because of his lack of transparency and arrogance. Many feel now that, even if he escapes the noose this time, another similar episode will not be far behind. Stability does not seem to be a practical reality for him, not now, not ever. He apparently thrives on chaos and there are various names for that condition, none of them flattering.

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