U.S. Bankruptcy Court Judge Michael Wiles approved a $9.5 million interim debtor in possession [DIP] loan for Relativity today and set August 14 for the next hearing to deal with its Chapter 11 filing. The judge allowed Relativity to spend $4 million from the DIP to compensate what it deems to be “critical vendors.” But he insisted that the lenders also approve the payments.
A Relativity lawyer called this “truly a tight budget. … This company is not big on buying goods. This is primarily for services” for movie and TV production.
CEO Ryan Kavanaugh says he’s “pleased that the Court has granted these motions, which will allow us to preserve value for our stakeholders.” They’re “an important milestone in our reorganization. I look forward to building on this momentum to emerge as a stronger company.”
The Bankruptcy Court decisions flowed from compromises after Relativity lawyers sought approval for a $45 million DIP loan. Creditors also wanted an expedited process that could lead to a sale to some of them by October 2. For example, they wanted to allow just 30 days for challenges to liens on different assets, as opposed to the usual period that can run 60 days or more.
The judge initially said that he wouldn’t be “handcuffed” by the conditions. He vowed to reject any proposal that would “put me in a position, right out of the box, of not having a longer sale process” that might draw in other bidders. “I’m not ready today, on the first day, to lock myself into such a short process.”
He also initially said that he would reject a proposal by current lenders to extract a 5% fee on the DIP loans if the group doesn’t take charge of Relativity.
A lawyer for the so-called “B lenders,” which include Cortland Capital, said his clients are “the only ones at risk here” because their loans are not collateralized as clearly as others. A delay would result in value degradation for the films, business losses and additional costs for the bankruptcy proceedings, he said.
“Therein lies the problem … there’s no golden goose here,” he said. “There’s nothing I can foreclose on.” He added: “We think there needs to be a sale” before 60 days. “I’d like to say October 31, Halloween. But it doesn’t work with the numbers.”
As for the fee if Relativity goes to someone else, he says it’s a standard interest rate.
The exchange seemed to belie the opening claim by a Relativity lawyer Richard Wynne that this would be “a plain-vanilla Chapter 11 case” involving “a good company, and an important company in an important industry.”
He added that “the media has been following every movement of our forbearance period.”
The DIP funds are needed to “keep the [movie] productions going, keep television going,” including payments to 760 temporary employees, Relativity’s lawyer said.
There are four movies that are complete but need funding to ensure a successful release. They include Masterminds, which originally was scheduled to be released in August but has been postponed to October. “Most of the money [in the DIP financing] is for buying television time.”
The problem is that “two weeks ago the company was effectively out of funds.” The result is that “every day we’re in Chapter 11 costs us a considerable amount of money. … We need to move as fast as possible through the process.”
Although some films have separate financing arrangements, another Relativity lawyer urged the court to accelerate the process because “we run out of money on October 2” — the date by which the company wants a sale to take place. “I know it’s a tight timeline.”
A lawyer for RKA Film Financing, which has sued Relativity and Kavanaugh for fraud, says that $50 million it loaned to promote the studio’s new movies was not used for that purpose. “We believe there may be fraudulent conveyance,” he said, adding that there’s “no basis” to speed up consideration of liens on the films.
Another attorney, for Manchester Securities, challenged Relativity’s “plain vanilla” description of the case. He says the issues involved are “grave.”