Relativity Bankruptcy: Judge Says Exit Plan Has Too Many Loose Ends – Update

UPDATE with latest testimony: U.S. Bankruptcy Court Judge Michael Wiles strongly hinted that he’ll reject Relativity Media’s effort to escape Chapter 11 protection later today after it makes closing arguments. He said at a hearing this afternoon in Manhattan that he still has major qualms about the studio’s finances and business deals that may lead him to keep it under court supervision for a while longer.

“You’re not there,” he told lawyers, who seemed startled by his comments. They are scrambling to deal with the judge’s concerns over the lunch recess.

He said he specifically wants to see solid agrrements regarding a $60 million term loan from Macquarie, $20 million in vendor financing, and Relativity’s employment deals with actor Kevin Spacey and his business partner Dana Brunetti — both lined up to run the studio.

The duo need to be “locked in” before he approves Relativity’s exit. The company said last month that it planned to acquire their Trigger Street Productions — but it told the court yesterday that the deal would not involve an acquisition.

Wiles says that this is a key issue because the studio has cited Spacey and Brunetti’s involvement as a major reason for its optimism about its prospects. He wants to hear more than that “discussions are far along, I want the actual terms of employment.”

Relativity lawyer Richard Wynne said the duo didn’t want to sign a deal until the studio’s out of bankruptcy. Due to “confidentialy concerns” he might only be able to share their employment terms in private — but will check over the lunch recess to see what he can offer to satisfy the judge’s concerns.

Other finanial agreements also “need to be more firmly in place….It’s just too vague and uncertain.”

The judge says he’s “a little nervous about approving based on financial projections that have not been fully explained to me.”

He added though, that “maybe it’s not an insolvable problem.”

Wynne said that “we want to address the court’s concerns and think we can.”

The judge said that he’s especially uncertain about whether Relativity will have sufficient capital to keep going. It originally expected to have more than $100 million in cash. But the plan now is to have $20 million — which the company says is enough to keep it going while it waits for revenues from completed films it expects to release.

Wiles recalled CEO Ryan Kavanaugh’s financing partner, Joseph Nicholas, to clarify some of his testimony from yesterday.

“I’m a little troubled that the only equity raise seems to be done by you as one of the plan proponents and one who will be a big equity owner,” the judge said. “The vagueness of it all leaves me wondering…Quite frankly it is hard for me to understand what is going on.”

Nicholas said that “there’s definitely a ton of interest” by potential investors.

“The minute we know that we’re clear [of bankruptcy] we have lists [of potential investors] and I’m going to have a point person coordinate them” to begin negotiations, he said. One unnamed company in particular said it might invest $50 million after Relativity is out of bankruptcy.

“That will set the pricing” valuation for Relativity’s equity, he said. If that company is not interested then “we’ll revisit.” But “there’s no way we’re not going to raise capital because we can’t raise a certain price” for the value of Relativity’s equity.

Nicholas added that in all of his conversations “we never got to the point where someone was ready to write a check and we turned them away.”

He said that he invested $50 million in Relativity before it went bankrupt last summer. Afterward, he put up an additional $29 million while Kavanaugh invested $1 million.

Relativity told Wiles that it is close to completing a deal with a major creditor, CIT Bank, to resolve its objection to the studio’s emergence from bankruptcy. It needs “two final signatures” from bank officers that will come “hopefully over lunch recess.”