Relativity Bankruptcy: How the Legal Proceeding Works

Ryan Kavanaugh Headshot - H 2014

Ryan Kavanaugh Headshot - H 2014

Lenders — including Anchorage Capital and Colbeck Capital — are in the driver's seat as the drama plays itself out.

Now that Ryan Kavanaugh’s Relativity Media has filed for Chapter 11 bankruptcy protection, a group of the company’s lenders has emerged who will be making a so-called “stalking-horse” bid for the company.

Identified in today’s bankruptcy announcement only as RM Bidder LLC, the group consists of Anchorage Capital Group, Luxor Capital Group, Falcon Investment Advisors and Colbeck Capital, The Hollywood Reporter has confirmed.

Anchorage stymied Kavanaugh’s attempt earlier this month to buy himself time when he struck a deal with the Canadian private-equity firm Catalyst Capital to buy $130 million in Relativity’s senior debt. Anchorage, in turn, then led a group that exercised a contractual right to buy out Catalyst. Adding to the drama is the fact that Colbeck Capital partners Jason Colodne and Jason Beckman had seats on Relativity’s board until May when the board requested their resignation after Kavanaugh blamed them for a negative story about the company.

Members of the RM Bidder group also are involved in the $45 million in debtor-in-possession financing that Relativity will use for its ongoing operations. Relativity has reached an agreement with RM Bidder group, which will become a stalking-horse bidder in an auction process handled by Blackstone Group that could close in October.

“Sophisticated investors understand what it is to acquire companies out of Chapter 11, and they generally try to become a stalking horse buyer,” explains bankruptcy attorney Brian Davidoff of Greenberg Glusker of the process. “Because if they get that stalking horse designation, it does give them a measure of security as well as insight into the process.”

Relativity — which said that it has $100 million to $500 million in assets and between $500 million and $1 billion in liabilities — now has to go through a process that could see it emerge intact, as MGM did in 2010, or lead to its sale, as happened to the visual effects house Rhythm & Hues in 2013.

First, though, Relativity will have to enumerate every asset it possesses, the value of which is difficult to predict. “It’s going to be all film rights, the desks and chairs in the office, the pencils in the drawers, everything they own. It might be royalties as a future stream of income,” says bankruptcy attorney Steven Gubner of Ezra Brutzkus Gubner. “Until there’s a very good examination of the books and records, we won’t know what they’re worth.”

The process will take some time. Under federal bankruptcy rules, the petitioner has 14 days to file the list of assets and other documentation. However, Relativity has filed to extend that deadline to 45 days.

In the meantime, the RM Bidder group effectively controls Relativity. Brian G. Kushner of FTI Consulting has been appointed chief restructuring officer, overseeing the company’s daily activities. Relativity has laid off 75 employees, is winding down its fashion division and has opened a page on its website dedicated to the bankruptcy process.

One open question is whether a potential buyer will want to buy all of Relativity as it's currently constituted, or whether Relativity’s various assets will be sold off to separate buyers. Says Davidoff, “It’s going to come down to a financial analysis — what brings more to the creditors?”