MGM Studio Buys More Time With Lender Agreement

Buyout-backed Hollywood studio Metro-Goldwyn-Mayer has secured a forbearance agreement with its lenders, winning some breathing room and liquidity as it continues to grapple with looming debt payments.

The studio, which has enlisted a restructuring specialist to help turn it around, faces debt obligations of $3.7 billion stemming from its buyout, plus payments on a $250 million revolving credit facility due April 2010. The company missed an interest payment on Sept. 30.

MGM was acquired for about $5 billion in 2005 by a group including Providence Equity Partners, TPG, DLJ Merchant Banking Partners, Quadrangle Group, and media giants Sony Corp. and Comcast Corp. The consortium bought MGM from its majority owner Kirk Kerkorian. JP Morgan Chase led the lending consortium for the deal, according to Thomson Reuters LPC.

Home to a renowned film library, including James Bond movies, MGM said the forbearance agreement, which expires Dec. 15, exempts the company from interest payments of an undisclosed amount as it continues discussion with lenders to develop a new capital structure and support a long-term business plan.

“With the agreement in place, MGM has taken an important first step in ensuring that the company has enhanced financial stability and adequate liquidity to implement its business strategies,” the studio said in a statement. “The company is appreciative of its lenders’ ongoing support. Under the terms of the agreement, MGM’s lender group has agreed not to enforce its rights or remedies arising as a result of the company’s request to not currently pay interest due on September 30, October 31, and November 30, 2009.”

Following September’s missed interest payment, secondary trades on MGM’s term loan fell to between 55.5 cents and 56.5 cents on the dollar, down from about 61.5 cents on the dollar a week earlier, according to Thomson Reuters LPC.

Also in September, MGM replaced chief executive Harry Sloan with a team that includes turnaround expert Stephen Cooper and production boss Mary Parent, as the storied Hollywood studio struggles to reduce a crushing debt load.

Sources in Hollywood told Reuters, publisher of Buyouts, that MGM needs to be merged or sold to be successful. But asked if MGM was considering an outright sale, Parent recently told Reuters MGM was positioning itself for the long term as a production company. Cooper and Parent, along with MGM Chief Financial Officer Bedi Singh, have been named “members of the office of the CEO.”

According to film financing experts, MGM’s operations have largely been funded recently by its library cash flow and access to $500 million of financing set up for its United Artists label, partly owned by movie star Tom Cruise.

MGM in May hired investment bank Moelis & Co to help refinance its debt and said it was talking with a steering committee of 140 creditors as part of the process. At that time, bankers estimated that MGM was paying north of $250 million a year in interest on its debt, which comes due in 2012.

Cash flow from MGM’s film and TV library operations finished 2008 down about 5 percent from a year ago, a source familiar with the matter previously told Reuters.

The difficulties faced by MGM only add to other recession-related woes already faced by the company’s sponsor owners. In September, Providence Equity lost its equity investment in newspaper publisher Freedom Communications (which it co-invested in alongside The Blackstone Group) when the company filed for Chapter 11 bankruptcy protection.

DLJ Merchant Banking, meanwhile, lost its portfolio company RathGibson Inc. to bankruptcy in July. The company was reportedly forced by lenders to seek protection after demand for its products fell. Also in July, Quadrangle Group handed over control of its portfolio company, Alpha Media Group, to creditors after the publisher of Maxim magazine defaulted on the debt issued for its buyout in 2007. Quadrangle had already written off the investment.

And TPG in February saw aluminum products maker Aleris International slide into bankruptcy just over two years after it was acquired by the firm for $1.7 billion plus the assumption $1.6 billion in debt. —Sue Zeidler is a Hollywood correspondent for Thomson Reuters, publisher of Buyouts.