Hurry up or go slow — that’s the question facing Relativity and its hundreds of lenders and creditors as the studio navigates the bankruptcy process.
The speed with which Relativity is put up for auction is already proving to be contentious after Judge Michael Wiles rejected a proposal for a $45 million loan because it had an Oct. 2 sale date as a condition for extending the money. The lenders who are offering the financing, who compromised by agreeing to a smaller $9.5 million loan, are expected to return to court next week. They plan to offer the full financing and tie it to a later sales date, asking for an auction in mid-October, according to a person briefed on the matter.
It remains to be seen if Wiles will consider that sufficient time, but bankruptcy lawyers tell Variety that there are reasons some secured creditors, meaning those companies that have liens on the studio’s assets, would want a quick sales process, while unsecured ones might try to slam on the brakes.
“The lenders are saying, ‘The company is going to run out of money — it’s a melting ice cube,'” said Brian Davidoff, an attorney from Greenberg Glusker. “But the other creditors are saying: ‘Hold on. We want to see the i’s dotted and the t’s crossed. We need to make sure the company is properly exposed to the market before it sells.'”
On the plus side, speeding up the sales process limits the fees that Relativity and its creditors have to pay lawyers and restructuring advisers. It limits the amount of time the company is effectively in limbo, without greenlighting more projects and investing in developing new films and shows.
“The value of the company may be maintained,” said Mark Scarberry, professor of law at Pepperdine University. “The longer a company is in Chapter 11, the greater the chance people won’t want to stay or will go work elsewhere.”
The downside is that getting the best price for a distressed company involves some salesmanship, and that takes time.
“You want the process to slow down in the hopes of finding the best buyer,” said Jude Gorman, general counsel at Reorg Research. “The debtors have the burden of proving they ran a process that was structured to get the highest and best offer, that they talked to other studios and put together materials that highlighted the company’s assets.”
In the case of Relativity, the companies providing the bridge funding (also known as a debtor-in-possession or DIP financing) are also stalking-horse bidders on its assets. Sources confirm that the bidding group includes Anchorage, Luxor Capital and Colbeck Capital, all of which are owed millions. The stalking-horse bid is set at roughly $250 million, and the lenders have included a 5% “kill fee” on the money they lend if they are outbid for Relativity — a deal that attorneys say will likely need to be negotiated downward.
“That seems rich,” Gorman said. “Three percent is what passes muster with judges in New York.”
The idea of a stalking-horse bid is to establish a minimum floor that the company can sell for, and an individual with knowledge of the auction said he expects Relativity will attract other bidders. Relativity CEO Ryan Kavanaugh has floated the possibility of finding an investor to help him buy back the studio. It’s not clear if it will fetch a higher price selling in its entirety, or if creditors will get more money if the television and film businesses are sold separately.
By offering the loan, the stalking-horse bidders have positioned themselves to be paid back before other players that are owed money. An adviser to one of the creditors said the lead secured creditors want to push for a quick auction because they believe it’s the best hope for getting their money out. But many other creditors would lose out in this scenario, and the adviser believes the judge recognizes this and will slow the process down.
“Judges don’t like to be pushed,” said the adviser. “It’s way too complicated for the judge to move ahead and say, ‘I am going to set this plan in stone.’ Because it will wipe out all the other creditors. That’s what would happen. And that’s why he will slow this thing down.”
Whether or not Relativity finds a buyer, the people who invested in the company and the vendors who provided services stand to lose money. Relativity has a book value of $560 million, but its liabilities are nearly $1.2 billion.
“The amount owed to the secured creditors is greater than what somebody might be willing to pay for Relativity,” said Byron Moldo, a bankruptcy attorney with Ervin Cohen & Jessup. “For the unsecured creditors, it’s unlikely they will get paid in full even if a sale goes through.”