Ryan Kavanaugh Relativity
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After a tumultuous year for Relativity Media that saw the independent company fall into Chapter 11 bankruptcy in late July, founder Ryan Kavanaugh is facing daunting challenges to reinvigorate his operation as 2016 gets underway. Following a series of lackluster films, the retreat of financial partners and accusations of fraud from a couple of one-time business allies, Relativity is looking at a tough road to recovery. Hollywood watchers are wondering whether the 41-year-old entrepreneur can right the ship and return the company to being a full-functioning entertainment enterprise. Here are 10 questions to help better understand whether Kavanaugh and his beleaguered company can stage a successful comeback this year.

Where is the money?

The reorganization plan Kavanaugh submitted to U.S. Bankruptcy Court Judge Michael Wiles calls for $100 million in new equity investment. But as the new year dawned, Relativity’s disclosure statements still left a big blank as to the source of that crucial money.

Given all the financial struggles of the past – which produced some $1.2 billion in liabilities against a reported $560 million in assets — the hunt for a new financial partner has been difficult. An individual close to Relativity said the company faces the same dilemma that it did for years pre-dating its July 30 bankruptcy filing. “It’s still a waiting game to see if Ryan can produce the new equity that he says he can produce,” said the source, who declined to be named. A former Relativity insider compared Kavanaugh’s task to “finding another unicorn investor”—this time in a Hollywood full of more stable competitors, also on the prowl for cash.

So what’s the upside for any new equity partners?

Kavanaugh has the advantage of a Chapter 11 reorganization that promises to remove hundreds of millions of debt from the company’s balance sheet. “Short-term memory is shorter in Hollywood than anywhere else in the world, other than in an assisted-living facility,” said one business partner, who  asked to remain anonymous. “Now he has deleveraged his business. So new investors would come in ahead of those who already had to write off their debt.” The business associate notes that Kavanaugh has been counted out before, only to rise again.

When will we know more?

February 1, if not before. That’s the date that Judge Wiles will hold a hearing to decide whether to confirm Kavanaugh’s reorganization plan. That would pave the way for an exit from bankruptcy and a chance to get back to something like normal business.

What does Relativity have to do to get its Chapter 11 exit approved?

With new equity investment perhaps the biggest hurdle, the company must persuade Judge Wiles that a reorganized Relativity can succeed.  That means, among other things, showing that the company won’t end up in liquidation, or another reorganization. Relativity must also show that the continuation of current management “is consistent with the interests of creditors and equity security holders and with public policy.”

Who will work for Relativity going forward?

Most of the top executives running Relativity and its film operation departed during the company’s collapse. The company in November hired a lead attorney, Andrew Levin, who previously worked for T-Mobile. An individual familiar with Relativity has said for weeks that discussions are ongoing with other potential new hires.

But the void is substantial. Relativity no longer employs key players responsible for putting together films and getting them to market. It’s crucial for the company to hire new executives to get the production train rolling again.

Can Relativity release new films, proving to the market it’s moving forward?

The company’s bankruptcy filings project a total of 14 movies to be released through the end of 2017, beginning this coming March with “The Disappointments Room.” But even the fate of that initial release – a thriller starring Kate Beckinsale – is far from clear.

The reason for the cloud over the title is a dispute with RKA Film Financing, a film-release lender that last year sued Relativity, claiming that Kavanaugh had misspent money that was intended to be used only to put out films.

RKA’s challenge puts a shadow over not only the “Disappointments Room,” but three other titles that the lender claims it ultimately has a right to seize because of Relativity’s failures. The other films – Halle Berry thriller “Kidnap,” Zach Galifianakis-Kristen Wiig comedy “Masterminds” and the horror pic “Before I Wake”—are among those that the company projects as its biggest potential grossers of 2016.

A potential settlement of the RKA-Relativity dispute is included in the company’s bankruptcy disclosures. But the deal has not been sealed. And a source close to the lender said it is still considering other options for releasing the films, without Relativity, with the studio countering that such a move would not be legal.

Is there less of a cloud over the future of other future Relativity releases?

Not all of them. Relativity has a sequel to its moderate hit, “Act of Valor,” on its calendar for May of 2017, to take one example. But the firm that licensed the story, IATM, says it had terminated rights to a sequel even before bankruptcy. Similarly, Relativity plans a 2017 sequel to its 2011 fantasy epic, “Immortals.” But a subsidiary of hedge fund Elliott Associates, a major Relativity lender, claims it holds the rights to the next “Immortals” installment. Relativity disputes the competing claims.

Relativity has had more success in muting another legal fight, this one with marquee producer Neal Moritz. The man behind the proposed Cold War submarine thriller “Hunter Killer,” accused Relativity  in a November bankruptcy filing of running a “sham” operation that had no real wherewithal to make and market films. Within a week, though, the producer and his partners settled the dispute and called it a “misunderstanding.”

What directors and stars would want to work on a Relativity film?

There’s such a surfeit of talent in Hollywood that certainly many are looking for any opportunity to take their place on either side of the camera, if Relativity finds money to make new films. But top performers are also cognizant of the fact that previous Relativity offerings have been held in limbo by the company’s struggles. “They won’t want to get involved in movies they don’t think will be released or that they think might have a difficult time paying a back end,” said one individual with close knowledge of the company.

Even if he gets his new operating cash, does Kavanaugh have money to release films?

Kavanaugh’s last P&A loan exploded into the lawsuit by RKA Film Financing. Relativity’s reorganization plans for $250 million in new loans for P&A and ultimates – the latter repaid by the cash flow generated by after-market sales to television, streaming services and other ancillaries. The company’s disclosure says that Aperture Media Partners and EMP Media will be co-lead arrangers of the new P&A/ultimates loan.

But one individual familiar with Relativity said the loans will come at a high price—the cost of borrowing jumping to more than 10% for the company, because of its past difficulties, compared to roughly 5% for others. The high interest costs will make it harder for Relativity to push back into profitability, said the individual, who declined to be named. Relativity would not comment.

Who is on Kavanaugh’s side?

The Relativity CEO has managed to keep an array of creditors at least open to negotiations during the five-month bankruptcy. The company announced Monday that the Committee of Unsecured Creditors, owed some $89 million at the start of the Chapter 11 case, had endorsed Kavanaugh’s reorganization plan.

It’s not like the firms stand to get a lot of money. The plan envisions a fund of $7 million to be divided by the vendors, with more money possible if they are successful in any future litigation. The creditors will get just 4 cents to 11 cents on each dollar they were owed, according to the Relativity disclosure. That’s not much, but more than the amount many speculated they might receive: zero.

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