The chance of bankruptcy at MGM grows


Things are going so badly with MGM's restructuring review that a forced bankruptcy is a real possibility by Sept. 15.

Then again, lenders don't want to lose control of the studio's lucrative James Bond movie rights. So one of them could still dig deeper to provide enough new equity capital to make a voluntary restructuring feasible.

Or if that option fails, the Century City studio could obtain a seventh extension of its debt forbearance agreement with its 100-plus lenders.

In any case, little more than a month before $400 million-plus in owed debt and interest payments come due, this much is certain: Frustration has never been higher with the more than yearlong effort to heal the ailing Lion.

"It's kind of become a joke," said an exec at one of the companies considering a strategic partnership with MGM. "There is a real fatigue among the lenders after all of the forbearance agreements."

The studio has secured six forbearance agreements, or delays of the deadline for paying principal and interest on its senior bank debt. Strapped by almost $4 billion in total corporate debt, MGM repeatedly has gotten lenders to postpone recoupment of a $250 million revolving credit facility and $200 million or so in related interest payments.

Certainly, the array of possibilities have grown no more appetizing since the Lion fired MGM chief Harry Sloan after a failed months-long search for studio financing. Its more concerted search for restructuring options kicked in the following November, when it formally retained the Moelis & Co. consultancy.

A forced bankruptcy reorganization -- like any prepackaged deal -- would shift MGM ownership from a current consortium to studio debtholders. But it also likely would spell the end of MGM's role as a film producer or distributor.

Several major film projects already have been stalled by the studio's financial ill-health, including the next James Bond pic and two films based on J.R.R. Tolkien's book "The Hobbit." Other projects treading water include a planned "Three Stooges" movie and a "Robocop" remake.

Should the studio be forced into bankruptcy court, it still could keep the lights on by shifting money tagged for debt interest payments to administrative purposes. But overhead, including exec salaries in the moribund film-production division, likely would be pared dramatically.

As for the fear of losing control of 007 rights, there is no legal consensus on whether lenders would lose those rights in the event of a forced bankruptcy. But such concern has been enough to force lenders to agree to the half-dozen debt payment extensions.

J.P. Morgan leads a steering committee representing the broader group of MGM lenders, which is also getting advice from the Houlihan Lokey advisory firm.



Those still talking with MGM management and the lenders about different strategic partnerships include execs at Summit, Spyglass and Lionsgate. But the devil remains in the details.

For starters, none of the proposed partners has been able to tap sufficient new capital as part of their respective restructuring proposals.

Before the restructuring talks, MGM had solicited bids for buying the company outright. But a top bid of $1.5 billion by Time Warner was deemed too low.

MGM owners include Providence Equity, TPG Capital, Sony, Comcast, DLJ Merchant and Quadrangle. The studio is being run by an office of the CEO comprised of turnaround specialist Stephen Cooper, CFO Bedi Singh and film topper Mary Parent.

Four hedge funds -- Anchorage, Highland, Davidson Kempner and Solis -- have corralled at least 35% of MGM's publicly traded debt during the past several months. The debt recently was trading at about 44 cents on the dollar.

Approval of a prepackaged bankruptcy would be needed from 51% of all lenders and a group representing two-thirds of the total amount owed. That latter provision gives the biggest debtholders an effective veto over any restructuring proposal.

There have been rumblings that Anchorage or other of the big debtholders would be willing to ante up new capital to complete a restructuring with one or another of MGM's prospective strategic partners. But its inexperience in Hollywood has been cause for concern among those in the broader lenders group.

The strength of Summit's proposal is its offer of international film distribution, which the Lion lacks, while a Spyglass-MGM combo hinges largely on the management prowess of the production company's principals Gary Barber and Roger Birnbaum.

Of the two, an arrangement with Spyglass is considered the simplest to value, but placing a specific value on the services of Spyglass execs has proven difficult.

An MGM-Lionsgate combo hinges on the parties first coming together on the companies' respective valuations. Then, Lions¬gate investor Carl Icahn likely would have to bless the transaction.

Another possible outcome to the long-running drama at MGM: "The big debtholders could just end up saying, 'Now I know why everybody hates this business,' " a financial-community source said. "And they just decide to go back to Time Warner."
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