MGM cash crunch creates 'high alert'

Houlihan Lokey hired to push restructure

MGM's cash-flow woes are rattling debtholders — so much so that the investor owners of the studio have formed a creditors' steering committee and hired financial consultancy Houlihan Lokey to propose restructuring options.

The Lion this year retained its own financial consultant, Moelis & Co., which also has been seeking a fiscal remedy. Cash-flow concerns have sparked talk of auditors potentially issuing a "going concern" warning by the end of June.

Process insiders said those working on restructuring options are on high alert that business as usual is over for the Century City-based studio. But concocting a palatable solution for MGM, whose operations have swelled in recent years to an estimated $150 million in corporate overhead, might not prove doable, even for the sharpest of consultants.

"People can be told, 'This is the Kool-Aid,' but then it's just a matter of whether they want to drink it," a well-placed financial source said. "They might say they want to keep drinking champagne."

MGM recently pared its payroll, which had been estimated as high as 400 employees spread among film, TV, consumer products and administrative units. Until then, MGM seemed to be sizing up, with execs assuring anyone inquiring that cash flow was sufficient to maintain a healthy balance sheet until the second quarter of 2010.

Last year, MGM began aggressively buying film scripts for a new film production unit topped by former Universal exec Mary Parent, and a few pics have gotten before the cameras. But the once-busy distributor-for-hire has not scheduled a summer theatrical release.

MGM's remake of the 1980 film musical "Fame" is in postproduction and slotted for release Sept. 25. "Hot Tub Machine," a comedy starring John Cusack, and horror thriller "The Cabin in the Woods" are lensing and tagged for release next year.

The studio essentially has been funding operations from its film library cash flow. But library income has taken a hit as recession-wracked consumers have pulled back from their spending on DVDs in general and catalog releases in particular that had been a virtual ATM for the Lion.

MGM said its execs met with lenders Thursday.

"The company reported that its cash flow for the fiscal year ended March 31 was in line with its budget and that the company is in compliance with all loan covenants," MGM said. "On the call, MGM also said it was exploring options for optimizing its capital structure and has begun talks with a steering committee of its lenders as part of the process. … The company is committed to its business plan, which calls for it to remain independent, continue its motion picture production and television activities and leverage the value of its film library."

The statement was issued after MGM's regularly scheduled quarterly meeting with investors. The creditors' steering committee has been meeting quietly since February and hired Los Angeles-based Houlihan Lokey on Tuesday.

A well-placed source stressed that the issuance of a going-concern warning is a theoretical possibility but is considered unlikely. Short-term debt payments are relatively nominal, and MGM's revolving credit facility through JPMorgan Chase won't expire until April.

But that doesn't mean the studio's business model can sustain itself indefinitely. MGM has been generating more than $1 billion in annual revenue, but its current cash flow is believed running at $500 million, projected on a yearly basis.

Meanwhile, debt is almost $4 billion, a crushing obligation that has creditors working to identify a range of options.

The most obvious include attracting new capital, selling studio equity, reducing operations — perhaps to mere film-library exploitation — or, as a last resort, liquidating the company. So far, MGM has come up dry in a months-long search for new capital or equity investment.

MGM is owned by a consortium including Sony, Comcast, TPG Capital and Providence Equity Partners. Operations at its United Artists division are funded separately through a $500 million film financing, secured last year from Merrill Lynch and set to run for five years. (partialdiff)