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Major Relativity Lender Faces Struggle to Collect $137 Million Loan

Among the long list of creditors scrambling to recover money in the Relativity Media bankruptcy is one lender that helped put the mini-studio on the map: Elliott Associates, the giant New York hedge fund.

It was Elliott’s loans of hundreds of millions of dollars that first funded Relativity-arranged film slates at major studios and then gave the upstart studio the wherewithal to produce and distribute its own films. And it is now Elliott, listed under subsidiary Manchester Securities Corp. in last week’s bankruptcy filing, that stands to lose as much as $137 million, plus interest.

An Elliott spokesman declined to comment and a lawyer for Manchester Securities did not respond to a call for comment Monday. A spokesman for Relativity Media also declined to comment.

But the giant fund, which has $27 billion under management, stands in the same position as many creditors in the unfolding bankruptcy — in a long line to collect from a company that appears to have very few liquid assets. Relativity lists liabilities of almost $1.2 billion and assets with a book value of just under $560 million.

Investors and lawyers who have examined the Beverly Hills based mini-studio closely said they believe the company’s remaining assets will be largely depleted by fees for bankruptcy lawyers and advisers. After that, also high on the list for potential recovery, are a bank that loaned money for the studio’s operating expenses and trade union members due past residuals. Only after all those groups are paid will any remaining funds from a proposed auction of Relativity go to the first tier of major creditors — led by Anchorage Capital Group and Luxor Capital Group. That group of senior secured creditors, alone, is owed more than $361 million.

With some experts suggesting that they think Relativity is not worth nearly that much, those waiting further back in line — like the Elliott Associates subsidiary –would appear to stand very little chance of collecting.  If the hedge fund has an out, it is not apparent yet in Relativity’s incredibly complex financial structure, which has been partially laid bare by last Thursday’s Chapter 11 filing.

Elliott’s bond with Relativity and its CEO, Ryan Kavanaugh, dates back a decade. The hedge fund helped back film slates in which Kavanaugh was the middle man. Then, in 2008, it gave him major backing to produce and distribute his own films. It was the crucial moment, according to multiple press accounts, in which Kavanaugh was transformed from film financier into film magnate. Some accounts put the value of Elliott’s investment at $1 billion.

But by 2010, there were reports of friction and dissatisfaction, as Relativity failed to produce any box office blockbusters. The hedge fund reportedly felt that its earlier investments had not performed and declined to invest more with Kavanaugh’s company.

Then, in 2012, investor Ron Burkle’s  Yucaipa Cos. bought out Elliott’s Relativity stake, according to multiple press reports at the time. Sources put the value of the Yucaipa investment at $150 million. Another piece of Elliott’s stake was sold late last year to another group of investors, but it retained a minority share of Relativity. But, like many reports about Relativity financing over many years, the details of the private company’s transactions remain shrouded in secrecy.

Last week’s bankruptcy filing showed not only the outstanding $137 million loan balance to Elliott’s subsidiary — still accruing interest of at least 7.5% — but also that the loan is subordinate to others. Besides the $361 in top-tier secured lenders, Manchester’s repayment also falls behind a bank loan that was used to pay the mini-studio’s operating expenses. That outstanding balance on that loan stands at nearly $28 million.

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