Liquidation threatens debt-laden MGM

The efforts to restructure Metro-Goldwyn-Mayer's massive debt load are beginning to play out like a war movie that, at this point, the studio itself could have trouble financing - reports the New York Post.

According to multiple sources, discussions between the studio's debtholders and equity owners have begun on a contentious note, with both sides threatening to force MGM into bankruptcy in order to gain leverage and extract better terms from the other.

Both sides staked out their positions during two conference calls Wednesday afternoon that lasted a combined six hours, according to a half-dozen sources on the call.

They described the calls, led by Zolfo Cooper restructuring specialist Stephen Cooper, as openly antagonistic, with some debtholders like Leon Black's Apollo Management and Stark Capital Partners threatening to push MGM into involuntary bankruptcy if their terms weren't met.

Until MGM defaults on one of its loans or funding obligations, however, the debtholders, who are being represented by JPMorgan Chase, can't liquidate the studio because equity owners -- Texas Pacific Group and Providence Equity Partners the most prominent among them -- are in control.

Moreover, sources said the equity owners believe the liquidation threat is a bluff because it would damage MGM's brand and trigger termination rights to lucrative franchises like "James Bond," thus hurting the studio's value and the amount of recovery for debtholders.

"Each side has one big bullet in their guns, and therein lies the standoff," said one source who was on the call.

All parties mentioned declined to comment or did not return calls for comment.

Sources said the key sticking point is that TPG and Providence won't give up control of the studio to the debtholders unless they receive some form of equity upside in a restructuring.

"The debtholders wanted to hear the equity holders admit they had no value left and give up control, but they didn't," said a second source who was on the call.

An equity-side source dismissed the zero-value theory, saying that whether it's 2 percent or 10 percent, "equity holders always get something" in the case of a pre-packaged bankruptcy.

The funds used by TPG and Providence to buy MGM can't afford to take another hit, which is one reason why they are insisting on an equity position in a reconfigured company. TPG has yet to write down its MGM investment and Providence has taken only a partial writedown on the investment.

Further galling debtholders is that they're being asked to fund ongoing productions while simple requests on their part, such as obtaining a list of debtholders, have so far been ignored.

"Why doesn't Providence or TPG write a check to fund production needs if they still believe there's equity value in the company?" asked a second source.

With more than 80 firms holding MGM's $3.7 billion in debt, no one holder has a large enough position to create problems on its own. But a group of holders could form a voting block strong enough to derail any restructuring proposal, which is why MGM is refusing to turn over a list of debtholders.

MGM's rising overhead costs and dwindling cash flow are also at issue, sources said, noting Cooper didn't outline any cost-reduction plans on the conference calls.

The equity-side source came to Cooper's defense, however, saying that he has been working on a "major cost reduction initiative" but wasn't ready to present it on the call Wednesday.

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