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Relativity Media ‘Hopelessly Insolvent’ as It Heads Into Bankruptcy Hearing

The senior lenders who control the fate of newly bankrupt Relativity Media will push hard Friday in U.S. Bankruptcy Court for a quick auction of the failed entertainment concern founded by entrepreneur Ryan Kavanaugh.

Those parties — which include Anchorage Capital Group, Luxor Capital Group, Falcon Investment Advisors and Colbeck Capital — have also put forward a “stalking horse” purchase offer to set a minimum bid for a Relativity sale that they hope will be completed by early October.

The “first day” proposals on behalf of Relativity make clear that the key decisions on the company’s future are now in the hands of the senior lenders and their newly designated chief restructuring officer, Brian Kushner, said bankruptcy experts. CEO Kavanaugh remains in charge of day-to-day operations, for the time being.

Senior lenders are owed $361 million and stand in the best position of recouping some of their outlay, ahead of hundreds of other creditors lining up to collect on more than $1 billion in bills. In their plan for the sale, Kushner reports that the hedge funds’ initial offer for the company will help “fuel a robust and competitive bid process” that will maximize the value of what is left of Relativity, to the benefit of all creditors.

But experts who have looked at Relativity’s heavily mortgaged assets say the entire company may be worth as little as $150 million, a value that would mean there would not be nearly enough money to cover even first-tier debt holders, much less the long line of other lenders, vendors and the bankruptcy advisers/lawyers — the latter jumping to the front of the repayment line.

“This is a hopelessly insolvent enterprise,” said an individual close to one of the senior hedge fund lenders.”There is no scenario for value to come back to anything near enough to pay even the bulk of the debt owed to the senior debt holders. The only truly solvent major enterprise inside Relativity, going forward, is the TV business.”

Despite the stark imbalance between debt and future value in the company, it’s unclear how much opposition, if any, will emerge today when the U.S. Bankruptcy Court in Manhattan conducts its first hearing on Relativity Media. That’s because the senior debt holders are asking, at least for now, for actions that mostly maintain the status quo, in order to prepare for the sale.

Because the senior lenders, now joined in a shell unit called RM Bidder LLC, are investment funds and not operating companies, they are expected to hold on to Relativity only long enough to sell it as a whole, or in pieces. The same group of hedge fund investors has also asked the court to approve $45 million in DIP, or debtor-in-possession, financing to pay the bills for the bankruptcy and auction and to keep the company operating, while they try to recover some remaining value.

But it remains possible that other creditors — including advertising and promotional firms and other vendors, who are owed a total of $89.9 million — will lodge objections in hopes of improving their currently bleak prospects of being repaid. Vendors typically will form a committee to advance their interests with the court.

While Kavanaugh had for weeks suggested he had a cash-flow problem that could be fixed, documents filed in the New York court made clear the desperate measures his company took to try to stave off insolvency in recent weeks.

Looking to extend a key loan for operations for just a few weeks in June, for instance, Relativity agreed to release all the cash flow from its already-depleted film library. That amounted to $32 million over two months that went to OneWest Bank, which had extended the loans for operating expenses, according to a statement from Kushner, an FTI Consulting executive who has been an inside Relativity’s operation for weeks on behalf of the big lenders.

The sweeping away of the film library proceeds removed one of Relativity’s dependable cash flow sources and “further drained the debtor’s already problematic liquidity situation,” said Timothy Coleman, a Blackstone Group financial adviser, also reporting to the court.

Also satisfying the loan from OneWest, the studio relinquished another $17.9 million from an account that had been used to pay residual and “participation” fees to producers, writers and performers who worked on Relativity films and TV shows, Coleman’s declaration says.

Relativity has a total of nearly $1.2 billion in liabilities on its books as of the end of 2014 and just $560 million in assets, according to the declaration from Kushner.

Wednesday’s filings laid bare the full extent of the mad scramble by Kavanaugh and associates at the Beverly Hills company to stave off the financial collapse.

The statements claim about $500 million last year in revenue, with $346 million coming from Relativity Film and just under $97 million from Relativity TV and much smaller amounts from music, digital and other divisions.  Not accounted for in those figures, and left outside the bankruptcy, are the company’s sports agency, school of the arts and joint film distribution venture with EuropaCorp.

The web of employees, vendors and others owed money by Relativity is large and tangled. Kushner, heading the lead lenders’ proposal, suggests that employees and many others should be paid first — in order to keep the company going and preserve some credibility in the entertainment industry. Among those who should be paid, Kushner argues, are producers, writers, performers and others who had “participation agreements” with Relativity. The payments need to be made, he said in the filing, “to attract and retain name brand producers and other talent.”

Guild members who have worked on Relativity films and programs should also be paid residuals for past work, because union contracts and state law require as much, Kushner wrote. As of the bankruptcy filing, Relativity owed a total of $28 million for both the guild residuals and the participation agreements, the restructuring officer said.

His report also noted that some vendors involved in producing and distributing Relativity films have stopped worked because of unpaid bills. Kushner recommended the payment of up to $6.4 million to “critical vendors” to try to maintain relationships with these companies and to stave off “catastrophic damage” to Relativity as a going concern.

Kushner also asked the court’s permission to pay some 760 temporary production workers, in order to keep films and television shows — and thus some cash flow — in motion. The restructuring officer also asked the court to allow $2.5 million in payments to make good on prizes awarded to contestants who appeared on Relativity game shows. If the prize obligations  to “innocent third parties” are not honored, the shows will have trouble continuing, he said.

Those “First Day” proposals from Kushner only begin to hint at the welter of competing interests waiting for repayment, with most having very little prospect of seeing their money, according to three individuals who are following Relativity’s finances closely.

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