Relativity Bankruptcy: Confirmation Reconvenes Tuesday as Company Seeks to Prove It Has Enough Cash

Ryan Kavanaugh Relativity
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UPDATED: Relativity Media will have to wait at least one more day before it gets court approval to emerge from bankruptcy.  After lasting through much of Monday, the company’s confirmation hearing  will reconvene at 11 a.m. on Tuesday.

During Monday’s hearing, it emerged that Relativity has raised only $20 million of the approximately $100 million it hoped to come up with in equity financing, but Joseph Nicholas, an investor in the company, said there were more than 50 parties interested in putting money in the company.

“We definitely can raise the money…it’s really about what kind of valuation will we be able to raise it at,” Nicholas testified in U.S. Bankruptcy Court on Monday.

Nicholas said that companies were interested in putting between $5 million and $100 million into the bankrupt studio behind “The Immortals” and “Limitless.”  The major hold up is that these parties don’t want to risk their investment while the company is still in Chapter 11.

Marni Weishofer, a film finance expert from Mesa Global, agreed with Nicholas’ assessment, predicting that there would be a “feeding frenzy” of investors once bankruptcy was over.

Judge Michael Wiles expressed some frustration with the lack of details about the studio’s financing, telling Nicholas, “I appreciate your confidence on your ability to raise equity ….but it’s a little short on specifics.”

Despite falling short of its projected capital raise, Matthew Niemann, a senior member of Houlihan Lokey’s Financial Restructuring Group and an adviser to the studio,  told the court that Relativity is sufficiently well capitalized and deleveraged to function for two to three years.

“We won’t be back seeking protection from our creditors as a result of the business plan and financing that we the debtors seek to embark on,” said Niemann.

Relativity, which filed for bankruptcy protection last summer, citing nearly $1 billion in debts, has now unwound $630 million in liabilities, Niemann claimed. He said the studio still had “material debt,” owing $280 million to creditors, but said the studio’s reorganization plan would allow it to “succeed and thrive going forward.”

A key part of plan involves the involvement of Kevin Spacey and his producing partner Dana Brunetti, as Relativity’s newly appointed chairman and president, and the two men who would be granted “carte blanche” greenlight authority.

Calling the appointment of Spacey as chairman and Brunetti as president of Relativity Studios a “game changer,” Richard Wynne, an attorney for the debtors, predicted that the producers of “Captain Phillips” and “The Social Network,” would attract higher-quality projects.

“You have to make movies people want to see,” said Wynne.

It was an unorthodox hearing, one with a lot of razzle dazzle to go along with spreadsheets and financial data.  Relativity screened trailers for the Zach Galifianakis comedy “Masterminds” and the Halle Berry thriller “Kidnapped” and shared a pre-taped video endorsement for its emergence from Spacey. At one point, Relativity founder Ryan Kavanaugh sprang from his seat to fix two recalcitrant television screens, so that they could broadcast financial data.

“Are you taking over as chief of IT now?,” quipped Judge Michael Wiles.

It may have been the first bankruptcy hearing to boast a clip from the Screen Actors Guild Awards. But the taped segment ended with Spacey’s speech, in which he gave a shout out to the theory of relativity.

Spacey told Judge Wiles that allowing Relativity to emerge  from bankruptcy, would enable to company to  “produce some great films in the future. ”

Contrary to press reports, attorneys for Relativity said that Trigger Street, the pair’s production company, has not been acquired outright. Spacey and Brunetti will have greenlight authority over the studio’s film and television production, but Trigger Street’s assets were not purchased. 

It was also a day dense in numerical data, from long-winded discussions about the financial lifespan of a movie to the opaque nature of Relativity’s capital structure.

For the first time since Relativity filed for bankruptcy, Kavanaugh was in court, flanked by his wife Jessica Roffey, the company’s managing director Carol Genis, and his parents, Jack and Leslie Kavanaugh, who he embraced warmly during the lunch break.

The hearing Monday came after a wave of new disclosures, the resolution of objections from many creditors, a few remaining complaints about the reorganization plan and fighting between Relativity and some of its creditors. Both CIT Bank and Netflix asked for the hearing to be postponed but Judge Wiles rejected the streaming service’s call for a delay of at least a week and CIT bank reached a late settlement with Relativity.

The holdouts against the reorganization said that Relativity had not been transparent enough about how it would fund itself after emerging from Chapter 11. Relativity filed additional disclosures and declarations supporting the reorganization in the days before the hearing, including a statement from Chicago investor Joseph G. Nicholas, who said he had invested nearly $80 million over the last year in the studio.

Unmollified by the disclosure was Netflix. The streaming service said it had no proof that Relativity’s new financial model would work and allow it to release films. Scott McNutt, an attorney, for Netflix was stymied in his efforts to have the hearing delayed, with Judge Wiles faulting the lawyer for a lack of “preparedness” and for failing to ask for discovery.

CIT Bank initially voiced similar doubts, but they had been resolved by Monday’s hearing. The bank was owed some $34 million it loaned Relativity to make two still unreleased films: “Masterminds” and “The Disappointments Room,” a horror film starring Kate Beckinsale.

Since entering bankruptcy, press outlets have reported that Kavanaugh and his team spent extravagantly. Nicholas said that as a condition of investing, he mandated that be co-manage the business and take over its financial accounting. He praised the company’s commitment to cutting costs and overhead by two-thirds since entering bankruptcy and reducing its “bloated infrastructure.”

He also implied he would be a sobering influence on Kavanaugh.

“Ryan’s like an electric motor and I’m going to try to act as governor to that motor,” said Nicholas.

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