Ryan Kavanaugh Relativity
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Relativity hoped to get approval Tuesday to emerge from bankruptcy, but questions have emerged about its efforts to find new investors and the amount of money it has been able to raise.

Despite an aggressive effort by attorneys for the studio to paint a portrait of the studio well positioned to re-emerge from the financial wilderness, re-invigorated and blessed with a new creative vision, U.S. Bankruptcy Court Judge Michael Wiles said that Relativity was not ready to exit Chapter 11 protection.

Wiles said he was worried about the studio’s level of equity financing. He noted there are a number of outstanding creditor and vendor objections, including an ongoing legal tussle with Netflix over a distribution agreement.

“We’re not going to be able to close the record,” Judge Wiles said in court on Tuesday, adding, “There are a lot of pieces that are not quite finished.”

Wiles praised the attorneys for their “Herculean” efforts to resolve issues and said progress had been made, but seemed skeptical that all the issues surrounding the studio had been resolved.

“I don’t fault you for wanting to emerge out of bankruptcy, but you’re not there,” said Wiles.

He told attorneys for the studio to extend its debtor-in-possession financing, which was slated to expire on Tuesday.

The judge said he did not feel comfortable approving Relativity’s exit to bankruptcy until it had a $60 million term loan from Macquarie Capital and $20 million in vendor financing in place, as well as a firm agreement to have Kevin Spacey and his producing partner Dana Brunetti take over the studio.

“There are a lot of other deals being done that still need to be documented,” he said, adding, “some of the pieces have to be more firmly in place.”

Attorneys for Relativity said that Spacey and Brunetti’s agreement was contingent on Relativity emerging from Chapter 11, which could be problematic. In January, Relativity announced it had acquired Trigger Street, the production label founded by Spacey and Brunetti, but in Monday’s hearing the studio’s attorneys claimed that the media had made a “mistake” and that there had been no purchase.

Relativity certainly did its best to put on a good show. On Monday, it trotted out a taped message from Spacey urging the court to allow the studio to emerge from Chapter 11 so it could go back to making movies, as well as testimony from Joseph Nicholas, an investor who has injected roughly $70 million into the company and plans to co-manage its finances with founder Ryan Kavanaugh. The studio also shared a sizzle reel showing trailers for upcoming films such as the Halle Berry thriller “Kidnapped” and the Zach Galifianakis comedy “Masterminds.”

During testimony, issues were raised about Relativity’s financial footing. Last month, the studio claimed to have raised $100 million in new financing, but it was revealed in Monday’s hearing that the company had only brought in $20 million in new capital, much of it coming from Nicholas. Relativity attorneys and financial experts, such as Matthew Niemann, a senior member of Houlihan Lokey’s Financial Restructuring Group and an adviser to the studio, said the company would be able to raise more money after it emerged from bankruptcy protection.

Judge Wiles asked Nicholas to retake the stand on Tuesday morning, and pressed the investor about whether or not potential financiers are being turned away because Nicholas and Kavanaugh’s valuation for the company was too high. On Monday, Nicholas had said that there were 50 parties interested in investing between $5 million and $100 million in the studio, but argued that they wanted to wait until Relativity exited Chapter 11 before making a commitment.

“We never got to the point where someone was ready to write the check and we turned them away,” said Nicholas, adding, “We will raise the capital and we’ll find out where the market is in terms of valuation.”

Nicholas invested $50 million before it went bankrupt and an additional $29 million after it filed. Kavanaugh, who will co-manage the business with Nicholas, invested $1 million.

Wiles pressed Nicholas, noting that the “vagueness” of the efforts to raise funding bothered him.

“I’m a little troubled by the idea that the only equity raise seems to have been done by you,” said Wiles.

Relativity filed for bankruptcy protection last summer, citing $1.2 billion in liabilities and assets with a book value of just $560 million. Last fall, its television business was auctioned off to a group of hedge funds that include Anchorage Capital, Luxor Capital and Falcon Investment Advisors. In bankruptcy, the studio has been able to wipe roughly $630 million from its books.

Despite Wiles’ concerns, attorneys for Relativity and for Kavanaugh scrambled to come up with ways to assuage the judge’s fears and convince him to approve the studio’s emergence from bankruptcy, but it appeared as though the studio behind “Limitless” and “The Immortals” will remain in limbo a while longer.

Richard Wynne, an attorney for Relativity, acknowledged that the bankruptcy was “a moving target,” but said, “We want to address the court’s concerns and think we can.”

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