Film Lenders, Guilds Get Concessions in New Relativity Media Auction Plan

The hedge funds pushing for a quick auction of Relativity Media have granted additional concessions — including a better chance of recovery for union members and lenders who financed film releases — in hopes that other creditors in the complex bankruptcy action will not try to slow down an Oct. 1 sale of the insolvent company.

The senior lenders — Anchorage Capital Group, Luxor Capital Group and Falcon Investment Advisors — said in a filing Friday that loans to RKA Film Financing, Macquarie Investment U.S. and others tied to promotion for film releases “must be paid in full in cash” before those films can be sold as part of the company auction. The filing in U.S. Bankruptcy Court in New York also said that the terms for sale of the company must be modified to assure payment of residuals to guild members.

In addition, the lending group that hopes for a September auction of Relativity said it would waive the “breakup fee” it had initially proposed receiving for leading the auction process. And the new filing says that a fund should be established to help creditors pursue any legal claims against Relativity.

These and several other concessions are designed to get other creditors to drop their efforts to block the Relativity auction, which has been tentatively set for Oct. 1, with a projected closing date of Oct. 20. The senior lenders said they made an initial $250 million “stalking horse” bid as “an option of last resort,” in hopes of kick-starting offers from outside interests.

Issues surrounding the bankruptcy and the lenders’ proposal to stage the hurried auction of the company — founded by Ryan Kavanaugh 11 years ago — will be considered at a hearing Tuesday morning in Judge Michael Wiles’ court in Manhattan.

Various other parties to the bankruptcy — particularly Manchester Securities, a subsidiary of the New York-based hedge fund Elliott Associates — have suggested that the parameters for the quick auction do not provide sufficient protections to assure that they will recover their money. Relativity owes Manchester $137 million, according to the bankruptcy filing.

The lenders suggest in their new court papers that additional time to market Relativity and its holdings — principally, a film studio and television production company — is not needed. The long run-up to the bankruptcy and reports of the company’s financial straits already made potential takeover bidders aware of the company and its assets, the lenders argued. “They are aware of numerous potential purchasers (including both strategic and financial buyers) that may decide to bid on [Relativity’s] assets,” the filing contends, though it does not name those potential bidders.

The senior lenders, which Relativity owes some $361 million, objected to any depiction of them as holding a clear winning position “engaged in a loan-to-own gambit.” It was only the fear of recovering nothing from their loans that prompted the financial firms “to fund a sale process that balances efficiency and value enhancement, thereby making them uniquely qualified advocates for value preservation.”

Further delay will only escalate costs and further the diminish the value of Relativity’s holdings, the filing contends. The papers note that $17 million in legal and other professional fees have already been generated in the first nine weeks of the studio’s financial crisis. Each additional week of infighting “will increase these already substantial costs and, thereby, reduce recoveries to creditors.”

Uncertainty both internally “and in Hollywood generally” will continue to sap the company’s value if it’s not sold soon, the filing contends. Key Relativity employees are being “actively” recruited by competitors. And production companies like IATM, which made the hit “Act of Valor” for Relativity, are suggesting they are leery of continuing the relationship, in particular for the making of a potential sequel.

The lenders note in their filing that the slowdown in Relativity’s operations means the mini-studio has not been able to “replenish their film and television libraries, expand interest in library product and otherwise preserve the inherent value of their most valuable assets.”

The papers from Luxor, Anchorage and Falcon make clear that the fallout from Relativity’s collapse could grind on for some time. The lenders’ new sales plan sets aside some of a $4 million “wind-down” fund to pay lawyers for unsecured creditors who are owed $89.9 million and to potentially pay for future litigation. This voluntary set-aside is “the best available evidence” that Anchorage, Falcon and Luxor are committed to a fair and equitable outcome in Chapter 11, the filing contends.

Indeed, the filing also reveals layers of intrigue in the case. It shows that an affiliate of Manchester (and thus hedge fund Elliott) is Heatherden and that Heatherden is, in turn a “member” of Relativity’s parent — Relativity Holdings. With a foot on both sides of the dispute, the Heatherden affiliate has suggested it never gave its approval for the Chapter 11 filing and that the bankruptcy is, therefore, not legitimate.

The senior lenders vehemently object to this argument, saying that, if the court accepted the arrangement, it would prevent Relativity “from ever administering its bankruptcy case.” It would effectively hold the entire bankruptcy process hostage to the repayment of the $137 million owed to Manchester, the filing argues, calling that “beyond the realm of reasonable possibility.”

The lenders advance multiple arguments against allowing Manchester to hold up the process, the most provocative being the claim that the firm took its powerful position, potentially controlling Relativity’s affairs if its loan could not be repaid, at a time when it should have known the studio was effectively already insolvent. That action effectively represents a “fraudulent conveyance” by Manchester, the motion argues.

It calls the moves by the Elliott subsidiary to scuttle the bankruptcy “the over-the-top gambit of a disgruntled debtholder,” bent on using a legal maneuver “to compel payment of its deeply subordinated debt claims in violation of both fundamental Bankruptcy Code principle and a controlling intercreditor agreement.”

Despite complaints, creditors like Elliott have not proposed an alternative reorganization of the company, the senior lenders argued. “The failure of the objectors to put their money where their mouth is provides further evidence that the risk of value degradation is very real,” Friday’s filing said.

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