Relativity Files for Chapter 11 Bankruptcy

Ryan Kavanaugh - H 2015
AP Images/Invision

Ryan Kavanaugh - H 2015

Relativity Media has officially gone Chapter 11 in one of the biggest bankruptcies in Hollywood history.

Ryan Kavanaugh's financially embattled studio filed papers today and will attempt to reorganize itself amid crushing debt. Relativity counts between 1,000 and 5,000 creditors, $100 million to $500 million in assets, and between $500 million and $1 billion in liabilities.

The studio is also officially up for sale. Relativity has reached agreement with an entity formed by some of its leading lenders, who will become "stalking-horse" bidders in an auction process handled by Blackstone Group. The auction hopes to close in October.

Relativity Sports, Relativity EuropaCorp Distribution (the film marketing and distribution joint venture between Relativity and EuropaCorp, USA) and Relativity Education were among those not included in the bankruptcy filing and are not part of the sale. Along with the Chapter 11 filing, Relativity says it has received a commitment for $45 million in debtor-in-possession financing provided by a group of unnamed lenders.

“Relativity continues to pursue its mission as a next-generation global media company, and we remain firmly committed to our film and television businesses," Kavanaugh said in a statement. "The actions we are announcing today will protect our valuable franchise and allow us to emerge as a stronger, more focused company. Our board and management team explored a variety of options to refinance Relativity’s debt, and we ultimately determined that the protection afforded by a court-supervised reorganization process will provide additional time and structure to achieve our financial and strategic objectives.”

The move comes after Relativity spent months searching for a new lender only to have subordinated debt-holders, led by Anchorage Capital, kick up a fury and one film financier stampede into court with claims of fraudulent mismanagement. This week, Relativity also eliminated 75 full-time positions across several divisions.

The bankruptcy, being handled by the Sheppard Mullin law firm, is quite literally a new chapter for a closely watched studio that surfed a wave of Wall Street money before the recession hit and also brought a quantitative approach to moviemaking.

Founded in 2004, Relativity burst onto the Hollywood scene with a pair of splashy slate financing deals ("Gun Hill Road") with Universal and Sony. Backed by New York-based hedge fund Elliott Management, Relativity poured more than $1 billion into the two studios, co-financing such films as Fast & Furious 6, Bridesmaids, Salt and The Social Network.

Along the way, the company expanded its scope, acquiring genre label Rogue and its library from Universal in 2009 for $150 million. Kavanaugh also strengthened his Chinese position by investing in SkyLand Film & Television Cultural Development, a China-based production company. One of the more attractive deals that Relativity spearheaded in the past few years was a pay TV pact with Netflix inked in 2010. That same year, Relativity also acquired the 45-person marketing and distribution staff of Starz’ Overture Films, giving it the ability to distribute its own slate of films outside of its Sony and Universal co-financing deals. In recent years, Relativity has mostly focused on midbudget films and touted long-tail financial returns.

Relativity's staff grew to some 350, and the company also boasted a thriving reality TV division as well as sports management and fashion operations.

But the large-scale ambitions always required a significant injection of capital. Ultimately, this could be the company's undoing, and bankruptcy documents in coming months could reveal more about the well-connected company including its deals and high-profile, large-living executives.

Relativity very nearly found a new lender in July when it reached a deal with Catalyst Capital for the Toronto-based company to purchase 100 percent of the secured debt valued at $130 million as well as invest $170 million in equity. But Anchorage then exercised its right to buy out Catalyst’s stake in the secured debt, thereby allowing Catalyst an out from its equity commitment.

In the meantime, there's been furious negotiations in recent weeks over Relativity's pending slate of films. Sony terminated Relativity's deal for U.S. rights to The Bronze, produced by the Duplass brothers, while other high-profile projects including Autobahn, Zach Galifianakis comedy Masterminds and Halle Berry action film Kidnap have been left hanging in the balance. On Wednesday evening, Relativity confirmed that it has relinquished domestic distribution rights to the Natalie Portman starrer Jane Got a Gun (it is unclear how much money changed hands for the filmmakers to buy back the rights to the film, which will likely land at The Weinstein Co.).

Now in bankruptcy, Relativity will remain in operation but will have its affairs overseen by monitors. All litigation against the company is automatically paused, and while employees will continue to see wages, the bankruptcy process raises uncertainties and pushes by creditors that could impact its dealmaking.