'Hobbit' stays with MGM

Debt deal allows studio to remain a player in adaptation

MGM has secured support from key lenders to allow the studio enough cash to proceed with its participation in "The Hobbit."

A recent proposal by MGM's new CEO Steve Cooper to defer interest payments on its debt load for the next three months on Thursday won a crucial endorsement from J.P. Morgan.

The investment firm leads a lenders steering committee that has been agitating for a dramatic restructuring of the Lion's operations and its ownership structure. In exchange for an agreement to limited interest forbearance, J.P. Morgan secured a few changes in existing debt terms.

Concern over MGM's hold on "Hobbit" is at the heart of the activity. In a 50-50 rights partnership with Warner Bros.' New Line unit, two "Hobbit" pics are being developed.

The first "Hobbit" aims for theatrical release in 2011, with Guillermo del Toro on board to direct that and a sequel. Peter Jackson, Fran Walsh, Philippa Boyens and del Toro are writing scripts for both and are expected to deliver the first screenplay by the end of November.

Warners will lead production and distribute at least domestically. For now, the Burbank studio also is covering any immediate expenses.

In the end, the forbearance was granted, but not everyone was thrilled with the move. But a 51% majority would have had to oppose the plan to block its implementation, and that was never likely given such a disparate group of lenders.

The move to delay interest payments until Dec. 15 wasn't motivated by any immediate fears of insolvency at MGM, as a recent company audit showed cash flow should be sufficient to keep the lights on for at least another year.

But both current management and the lenders realize the studio's various rights on major properties such as "Hobbit," "The Pink Panther" and, most of all, the lucrative James Bond franchise are key to MGM maintaining a decent market value.

Eventually, once equity is shifted from the Lion's current owners to the lenders group, an auction likely will be held for the studio. Keeping its 50% hold on "Hobbit" -- broadly viewed as a potential big moneymaker -- would bolster interest in bidding on the Lion.

In backing the studio's payment holiday, lenders will get weekly reports from MGM regarding its cash levels and other financial details. Execs also pledged to submit a detailed restructuring proposal and updated valuation of its assets by Nov. 30.

MGM execs hope to corral at least $40 million for its "Hobbit" activities. The requested interest deferrals amount to more than $50 million.

Lion management first proposed the forbearance on Sept. 28, seeking a payment holiday until Jan. 15. The shorter period of interest deferral was hammered out in subsequent negotiations with lenders.

Current MGM owners include investment firms Providence Equity and TPG, Sony and Comcast.

A banking source said some of the tweaks to debt terms will begin to dilute those owners' current equity. A much more dramatic shifting of equity is expected over coming months as lenders agree to convert debt to equity.

Once the lenders become owners, that group likely would conduct an auction for the assets. Nobody sees the lenders group as a long-term operator of MGM.

Georg Szalai in New York contributed to this report.