BEVERLY HILLS, Calif.--(BUSINESS WIRE)--Events Leading to Chapter 11 Cases
Prior to the maturity date of the Cortland TLA/TLB Facility, Relativity sought to raise additional funds for its operations and to service existing debt. On or about May 11, 2015, these efforts resulted in the issuance of 5,000,000 Class E Units in Relativity Holdco to entities affiliated with an individual investor and VII Peaks in exchange for $62,500,000 gross cash proceeds. Simultaneously with the issuance of such equity interests, and at various times subsequent thereto, holders of the aggregate amount of 96.5296 Class C Units exchanged such Class C Units for an aggregate of 6,695,648 Class E Units pursuant to exchange agreements entered into concurrently with the Class E Unit issuance on May 11, 2015. In addition, Relativity had lined up in excess of $400 million in a combination of debt and equity commitments to refinance or pay off the Cortland TLA/TLB Facility prior to its maturity date. However, unbeknownst to Relativity, certain insiders and fiduciaries of the Company thwarted Relativity’s debt and equity raise in breach of their fiduciary duties and in interference with Relativity’s refinancing process.
Specifically, Colbeck Capital Management (“Colbeck”), while acting in multiple capacities including while having representation on Relativity Holdings’s Board of Managers, while being paid as consultants to Relativity, and while acting as agent for the TLA/TLB facility with significant management and financial oversight powers and duties, breached their fiduciary duties and other obligations and agreements, through a clandestine plan designed to effectuate a change in control of Relativity for their benefit and to the detriment of the company and its other stakeholders. With full knowledge of Relativity’s debt and equity financing efforts, Colbeck intentionally diverted sources of equity and debt financing away from the company’s efforts and instead sought to have such sources committed to their clandestine plan. Colbeck recruited Relativity’s then CFO Andrew Matthews and then President of Production Matthew Alvarez to join meetings with investors to further promulgate the false perception that Relativity, its Chairman and CEO, and the Board were aware of and supportive of the Colbeck plan. Relativity believes that Colbeck represented to third parties that its efforts were Board authorized and approved, when they were not. As a result of the actions of Colbeck and its co-conspirators, Relativity was unable to conclude its debt and equity refinance efforts and on the maturity date of the Cortland TLA/TLB Facility, over $360 million in debt became due and payable as of the Petition Date and Relativity was unable to make payment on the Cortland TLA/TLB Facility.
On June 1, 2015, Relativity entered into a forbearance agreement with a majority of TLA Lenders and a majority of TLB Lenders (the “TLA/TLB Forbearance Agreement”). On the same day, Relativity executed a forbearance agreement with the Ultimates Lenders under the Ultimates Facility (the “Ultimates Forbearance Agreement”), and thereafter, on June 5, 2015, Relativity entered into a forbearance agreement with the P&A Lenders under the P&A Facility (the “P&A Forbearance Agreement,” and collectively with the TLA/TLB Forbearance Agreement and the Ultimates Forbearance Agreement, the “Forbearance Agreements”). On June 25, 2015, the Forbearance Agreements expired in accordance with their terms.
In early July 2015, Catalyst Capital Group, a Toronto-based hedge fund (“Catalyst”) purchased the outstanding Cortland Term Loan A debt and became the sole lender under the Cortland Term Loan A. Anchorage Capital Master Offshore, Ltd. and Luxor Capital LLC, as lenders under the Cortland Term Loan B (the “Purchasing TLB Lenders”), promptly provided notice of their intent to exercise their right under Section 10.17 of the Cortland TLA/TLB Financing Agreement to purchase the outstanding debt under the Cortland Term Loan A. On July 9, 2015, the Purchasing TLB Lenders, along with Catalyst (also a lender under the Cortland Term Loan B) purchased all of the Cortland Term Loan A debt.
On July 16, 2015, the Cortland Borrowers and the Cortland Lenders entered into Amendment No. 1 to the Cortland TLA/TLB Financing Agreement, pursuant to which certain of the Cortland Lenders funded $15 million of additional Term Loans (“Term A-1 Loans”) of which $7.5 million was funded on July 16, 2015 and $7.5 million was funded on July 20, 2015. The Term A-1 Loans had a maturity date of July 27, 2015 and interest was payable in cash at a rate of 15% per annum. On July 27, 2015, the Term A-1 Loans matured.
Beginning in April of 2015, funds that would otherwise be available to be transferred to the cash collateral account and subsequently transferred to the Debtors’ operating accounts to be used for working capital, were swept by the Ultimates Lenders. The sweeps continued through July of 2015, and in aggregate totaled approximately $32,541,661.20. On July 17, 2015, the Ultimates Lenders swept an additional $17,881,299.24 on deposit in the participations and residuals account, a bank account at OneWest in RMLDD Financing’s name that is used to pay participations and residuals to the producers, performers, writers and other individuals or entities entitled to compensation for the exhibition of the content developed, produced, and/or distributed by the Debtors and the Non-Debtor Subsidiaries. The swept funds were applied to the outstanding balance of the Ultimates Facility.
Relativity experienced severe liquidity constraints and increasing limitations imposed by the Forbearance Agreements and the new debt issuances. With over $350 million in outstanding matured secured debt and unable to finalize any further financing due to a variety of factors, Relativity determined it was in its best interest to file for bankruptcy protection.