Ryan Kavanaugh Relativity
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Kevin Spacey addressed U.S. Bankruptcy Court on Monday via a pre-taped video, declaring himself “enormously excited” to take over as Relativity Studios’ chairman.

The “House of Cards” actor said he had filmed his remarks after winning a Screen Actors Guild Award last weekend and urged Judge Michael Wiles to allow Relativity to emerge from Chapter 11 protection.

“Rule whatever you want — frankly you’re the judge,” Spacey said, adding, “I hope that it will go forward and we will produce some great films in the future. ”

Spacey and his producing partner Dana Brunetti are taking over the creative direction of the bankrupt studio, but 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. 

As part of Spacey’s taped remarks, Relativity screened trailers for two of its upcoming films, the  Zach Galifianakis comedy “Masterminds” and the Halle Berry thriller “Kidnapped.”

Spacey was not physically in the court room, but Relativity founder Ryan Kavanaugh was on hand, along with his wife Jessica Roffey, investor Joseph Nicholas, and managing director Carol Genis. Kavanaugh was outwardly genial, shaking lawyers hand, winking at friends and family, and embracing his parents, Jack and Leslie Kavanaugh, during a lunch break.

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.

The hearing Monday came after a wave of new disclosures, the resolution of objections from many creditors and 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. 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, the Kristin Wiig, Zach Galifinakis comedy “Masterminds,” and “The Disappointments Room,” a horror film starring Kate Bekinsale.

Nicholas argued in his declaration, filed over the weekend, that several recent developments gave him confidence the reorganization could succeed—led by the arrival of new investment and the recently-announced partnership with Spacey, Brunetti, and their production company, Trigger Street.

“I am satisfied that it is reasonably likely that we will accomplish those projections in a manner that supplies sufficient liquidity to perform for the three year period of the business model,” Nicholas said.

While Relativity previously promised to deliver $100 million in new equity investment, Nicholas referred to $150 million in combined debt and equity that he said would allow the company to emerge from Chapter 11. He also noted that brokers are working to arrange a $150 million operating loan and said the company expected to bring in $50 million in additional equity this summer and another $50 million in the summer of 2016. Nicholas did not give any specifics about who would supply any of the fresh cash.

Attorneys for Relativity said that equity financing and financing to produce and market the studio’s films would have to be finalized after the company emerged from Chapter 11.

“Where we are is not where we had hoped or anticipated to be,” said Wynne.

Another Kavanaugh associate also voicing support for the plan was Ronald Hohauser, a financier and previously chief financial officer at Summit Entertainment. Hohauser worked with Kavanaugh as they arranged financing that allowed Marvel to advance from a company that licensed comics to one that produces films from that same IP.

Hohauser suggested that several recent developments benefitted Relativity, notably the hiring of Spacey and Brunetti, who, “have produced award-winning films that have earned substantial box office receipts.” He added: “Their presence at the company may . . . expand opportunities for Relativity to work with talent that otherwise it did not have access to.”

The Relativity ally also argued that CIT Bank would make more money by letting the studio release “Masterminds” and “The Disappointments Room,” rather than trying to seize the films and have them released by another distributor. Hohauser said CIT would get a “substantial benefit” because Relativity had agreed to waive a distribution fee, that typically ranged from 12% to 20%.

Though CIT and Netflix held out against Relativity’s reorganization, most other lenders and other creditors had signed off on it. The senior lenders who already got Relativity’s TV unit in October  – Luxor Capital, Anchorage Capital and Falcon Investment Advisors — agreed the reorganization could go ahead. So did subsidiaries of Elliot Associates, the giant hedge fund owed more than $137 million by Kavanaugh’s company. Lenders RKA Film Financing and Macquarie Capital also fell into line, although RKA has not given up a New York state lawsuit in which it accuses Kavanaugh of fraud for allegedly misspending film release loans; a charge he has denied.

Many lenders and creditors who might have considered fighting faced a powerful disincentive: the alternative would be a liquidation of Relativity that promised to deliver even less. The company had proven during the auction to be of little interest to buyers and advisers said there was no evidence the company would be more valuable now, four months later.

Relativity and its investors could earn “outsized returns,” Hohauser predicted, with a couple of big qualifications: it must “produce high quality films that earn healthy box office while maintaining cost discipline.” Critics would say Kavanaugh’s company has shown little evidence in the past it can do any of those things.

 

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