Creditors: Relativity’s Speedy Auction ‘Deeply Flawed’ or a ‘Bait-and-Switch’

UPDATED: The hopes of Relativity Media’s senior lenders to conduct a speedy auction of the bankrupt TV- and film-maker or its assets was greeted with a wave of opposition Wednesday. Unsecured creditors objected to the “deeply flawed” sales process, saying in a legal filing in U.S. Bankruptcy Court in Manhattan that the process is “on its face inadequate and diminishes the prospect of a robust auction.” A firm that loaned  money for the post-release publicity of Relativity films called the hurried sale a “bait-and-switch.”

The objections poured in before a Wednesday afternoon deadline, in anticipation of a Friday morning hearing before U.S. bankruptcy judge Michael Wiles. Viacom and Netflix also lodged protests. And the exact nature of another objection remains unknown, because another major lender, Manchester Securities Corp., filed its motion under seal, saying it did not want to reveal proprietary information about Relativity. Manchester is a subsidiary of Elliott Associates, the giant New York hedge fund that helped Relativity become an independent studio and that is now owed more than $137 million.

The complaints were in response to Relativity’s senior lenders, who are leading the bankruptcy and propose an auction of the company or its pieces on Sept. 16. The senior lenders — Anchorage Capital Group, Luxor Capital Group and Falcon Investment Advisors — said the sale of the company must occur quickly to preserve maximum value.

But Judge Wiles showed some sympathy for those who want to slow the Relativity sales process. During the initial hearing on the case, on July 31, he told the parties that the lenders leading the proposed auction “will have many benefits from Chapter 11,” adding that “the price of doing that is that they need to give [the Court] the time to ensure that this process is handled in a way that generates the best value.” Wiles added: “I will not tie my hands with deadlines that will not allow me to have an appropriate sale process.”

Relativity had filed for Chapter 11 protection a day earlier, on July 30. It has laid off 75 employees and postponed several film releases. The company reported nearly $1.2 billion in liabilities against claimed assets of about $560 million. Hedge fund operators and others examining the company say they think it is worth substantially less.

Relativity executives have declined to comment on the ongoing bankruptcy.

The lenders controlling the proposed auction made a “stalking horse” bid of $250 million, in hopes of inspiring higher outside bids. Under their recommended procedure, interested parties would express their intent to acquire some or all of Relativity by Sept. 3. Bids would be due Sept. 11 and an auction commenced on Sept 16, with a hearing before Judge Wiles scheduled for Sept. 21. The entire process would be concluded by Oct. 2.

But many of those worried they would get little or nothing from the expedited process spoke out via filings with the court Wednesday.

A recently-formed Committee of Unsecured Creditors, owed $89.9 million, said if the lenders’ plan goes ahead, “no cash proceeds will be available” to the dozens of ad firms and others that are owned anywhere from a few thousand dollars to more than $30 million.

The objections, filed by attorney Albert Togut, suggest that substantially more time is needed to hold a sale that will attract maximum bids. Many schedules and financial statements that will be key in helping bidders assess Relativity’s value will not even be filed with the court until Sept. 13, two days after bids are due, the creditors said.

In addition, the legal objection says the $250 million opening offer by lenders does not provide enough information for potential buyers to respond. Strategic buyers need some idea of the valuation of the studio’s individual units, the legal filing says, particularly the TV production operation that is believed to be the company’s most valuable asset.

The creditors say Relativity already has “been contacted by at least one party with bona fide interest and the financial wherewithal to purchase the debtors’ TV business,” but progress on that potential deal is difficult because Relativity does “not yet have a data room containing the requisite due diligence materials up and running,” the creditors motion contends.

The Creditors Committee is just one of several entities trying to slow down the fast-track auction.

Macquarie Investment U.S. said in its own filing with the court that it also objects to the speedy auction, because the expedited sale of the company founded by Ryan Kavanaugh does not “ensure that the bid submitted by the stalking horse bidder is the appropriate floor for an auction process.”

“The only parties to benefit from this accelerated timeline” are the senior lenders, “each of whom is attempting to run away with valuable assets of [Relativity] — not on a going-concern basis, but on a cherry-picked, piecemeal basis,” the filing by Macquarie contends.

Lawyers for the investment firm, which is owed more than $32 million for promotion of Relativity films that have already been released, called for a scrapping of the hurried sale, asserting: “The timeline proposed in the bid procedures motion … cannot be approved.”

The motion objects to a proposed sale that would remove Macquarie’s claims on the films, calling it “an aggressive sale process designed to chill bids.”

Another objection had come earlier from RKA Film Financing, which loaned money for pre-release promotion of Relativity films. The financier said it holds a  lien on four Relativity films that have not yet opened. In its court motion, RKA said it should be allowed to seize control of “Masterminds,” “Somnia,” (also titled “Before I Wake”), “Disappointments Room” and “Kidnap.” The finance outfit says it would find a new distributor for the pics and release them to recoup the $85 million it loaned Relativity.

Netflix also raised more modest objections to the proposed bid procedures, saying it wanted to be sure that it had the right to approve any new potential partner. The giant content streaming service now has a contract with Relativity, which provides films to Netflix for a fee. One financial analysis by a Relativity lender put the value of the Netflix deal at $56 million, at least.

But Netflix said that Relativity has been slow to deliver its films this year. It said that Relativity has “to date, provided only two films to Netflix in 2015,” and adds: “This gives rise to substantial concerns regarding whether [Relativity] will be able to meet their yearly minimum for the 2015 calendar year.” Netflix said the court should also give it a say over any new owner that would take over those obligations. Its contract with Relativity runs through 2018.

An additional objection came from Viacom, which said it held an interest in some of Relativity’s programming — including the “Catfish” TV series, which airs on the conglomerate’s MTV and films, including “The Fighter” and “Masterminds.” Viacom said it didn’t want the auction proceeding if its “security interests” in those creations would be diminished.

There was also one union objection filed: The American Federation of Musicians, AFL-CIO, said it wanted a statement placed in the auction contract that specified that any future owner of Relativity or its units was required to follow through with residual payments to musicians.

Another highly contentious objection to the quick sale could come from Elliott Associates, via its Manchester affiliate. The hedge fund helped Kavanaugh turn his company from primarily a film financier into a full studio. Though Elliott has pared down the outstanding loan principal owed by Relativity over several years, it is still is $137 million in the red to the studio, according to last month’s bankruptcy filing.

Lawyers for its subsidiary said they already had received 17,000 pages of discovery from Relativity and would have no way to fully express their concerns by Fridays hearing. They reserved the right to assert their objections later and said they would do so under seal, at least initially, to protect confidential financial information about Relativity.

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