Even senior financial experts are scratching their heads over the structure of the deal that THR says Relativity’s CEO Ryan Kavanaugh made with Catalyst Capital Group to help his struggling company. The Toronto-based private equity firm is said to have agreed to pay $150 million for all of Relativity’s senior secured debt, and spend $170 million for an unknown amount of its equity. Relativity would not comment and Catalyst did not respond to requests for comment.
Some of the smartest financial minds in town say the big question is what the terms of the agreement are, and whether there are any covenants restricting Kavanaugh’s ability to make key spending decisions?
According to one source with knowledge of the negotiations, Catalyst would replace a number of senior, secured debt holders and become the sole one in that position. It’s said to have agreed to extend the senior secured debt agreement for a year, pick up a seat on Relativity’s board, and let Kavanaugh continue to run the company, possibly, people say, to save face. Catalyst, which was founded in June 2002, buys distressed assets from troubled companies and then restructures and controls them.
If Relativity’s business collapses, then owners of senior secured debt would be among the first to be paid. Catalyst likely also has a right to convert its debt into equity, for example after a bankruptcy proceeding.
What experts can’t figure out is why the firm would also take a risk by buying equity, which could become worthless if there’s a default. “It makes sense that (Catalyst) would buy the debt, but not without a total restructuring of the company,” said one person with knowledge of the Relativity situation. “This is a band-aid as the lenders just want their money back and to get out of what they see is a folding house of cards.”
Injecting equity in addition to debt is not something that Catalyst has customarily done. In the case of the RHI- Robert Halmi’s now defunct TV production and distribution company – Catalyst acquired the debt, which it then converted to equity after the a pre-packaged bankruptcy in 2012 and re-launched the company as Sonar Entertainment. Catalyst is still in Sonar, which recently made a big bet on Tom Hardy’s upcoming event TV series Taboo, which he stars in and will produce with Scott Free.
What is confounding all the individuals who spoke to Deadline with knowledge of the companies and structured debt is why Catalyst would play BOTH sides of the game, by buying significant amounts of debt and investing an even more significant amount of equity.
There is likely a provision that Relativity will not take on any more debt as right now they haven’t enough money to operate, said one source with knowledge of the company. Clearly, finding a new lender doesn’t resolve any problems because it continues to add debt.
“The only thing that really makes sense is if Colbeck has an agreement and says, if you pay off A then we will give an extension for B,” thinking, of course, that eventually they will sync up in a year from now. According to one source with knowledge of the negotiations, Relativity is banking on Colbeck and other lenders agreeing to a one-year extension.
What’s more, few believe that this will end Relativity’s troubles, in the short to medium term at least. Said one producer with business dealings with Relativity, “no matter what happens, you have no idea what’s going on there. It’s not as if they’re going to be my first call.”
Relativity recently hired Blackstone, FTI Consulting, and law firm Jones Day to help restructure the company. The three firms are said to have a relationship with Catalyst.
Kavanaugh’s Relativity has been propped up by a number of investors over the years, including One West Bank and Dune Capital’s Steve Mnuchin, billionaire investor Ron Burkle via Colbeck Capital and Elliot Management. They also have entertained reverse mergers to no avail. The company has been kept afloat by various loan arrangement and facilities.
If you look at the assets of the company, you have the Netflix agreement and international distribution, but that lies on the shoulders of a shaky movie division. “When you are looking at Masterminds as the film to carry you, you are in a bad situation,” said one executive at a competiting studio. Masterminds, set for release on August 21, is a comedy starring Zach Galifiankas and Owen Wilson. In recent weeks, Relativity has also looked for outside players to partner on films, such as STX Entertainment, which has not worked out in the way they had hoped for.
The sports division is facing a number of lawsuits, but the reality TV division with properties like Guy’s Grocery Games, Restaurant Stakeout, Kitchen Inferno, Catfish, My Hero, has done well.
David Lieberman contributed to this report.