Firm scoops up MGM debt

Elliott Associates' plans unclear

Elliott Associates, the primary financial backer of Ryan Kavanaugh's Relativity Media, has been aggressively acquiring distressed MGM debt.

There is no equity position tied to the hundreds of millions in MGM debt securities that the New York-based hedge fund has acquired -- at about 58 cents on the dollar -- and the firm's end game is unclear. MGM has almost $4 billion in debt, so acquiring $300 million of the total would give Elliott only a 7% share of its "paper," or tradable financial instruments.

A Relativity spokesperson on Monday denied an online report that Kavanaugh is angling for control of MGM. Indeed, even for Elliott, more modest aims appear more feasible.

Elliott has been helping West Hollywood-based Relativity morph from a financier of studio slates into an independent film producer. So one possibility might be that Elliott eventually would agree to wipe clean its hundreds of millions in MGM debt in exchange for Kavanaugh's gaining rights to a number of titles in the studio's film library.

Seven of the studio's largest creditors are represented on a creditors' steering committee that was formed in February. There are 144 MGM creditors in total, with none holding more than a single-digit portion of its debt.

The creditors' steering committee was formed amid spreading concern that the Lion's dwindling cash flow might be unable to sustain operations, a situation traceable to diminishing DVD sales and library cash flow.

Last week, the creditors hired L.A. financial advisory Houlihan Lokey to propose restructuring options for MGM, which separately has been working with Moelis & Co. in a search for new capital. JPMorgan, which led lenders on MGM's $250 million credit facility that is set to expire in April, also is represented on the steering committee and is acting as administrative agent for all Lion creditors.

For its part, MGM is focused primarily on finding a new source of capital to avert any major restructuring of the studio, which has resurrected a production arm to get back into the moviemaking business after a brief stint as distributor-for-hire. Moelis is believed to be hunting a cash infusion of $600 million or more to help the Lion avoid tougher measures of the sort the creditors' steering committee have in mind.

In the absence of a new infusion of capital, creditors are likely to push for a dramatic restructuring of the studio. Options range from downsizing operations dramatically to a liquidation of assets, with Houlihan Lokey charged with detailing proposals for the creditors to submit to the studio.

Even without any new capital being identified, it's possible the parties can agree on a restructuring without a Chapter 11 bankruptcy filing. But any failure of the studio and its creditors to agree on a remedy, combined with failure in the hunt for new capital, could trigger a court-supervised reorganization.

MGM is owned by a consortium including Sony, Comcast, TPG Capital and Providence Equity Partners.

Elliott -- founded in 1977 by one-time arbitrage trader Paul Singer -- holds an unspecified minority stake in Relativity. Under a deal inked last year, Elliott and Relativity agreed jointly to co-finance about 75% of Universal's movies through 2012.

Kavanaugh previously had tapped several hedge funds in slate deals for Uni and other Hollywood majors. But with close ties to Elliott and fund portfolio manager Jesse Cohn, the Relativity founder has shifted the company's focus to proprietary productions.

Relativity last year acquired Uni's genre label Rogue Pictures and more recently signed an output deal with Lionsgate to secure distribution of non-Rogue pics produced by Relativity.
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