METRO-Goldwyn Mayer (MGM) is teetering on the edge of bankruptcy. The New York Post reports that some creditors were threatening to force the movie studio into involuntary bankruptcy if their terms were not met. MGM hired restructuring expert Stephen Cooper as its top executive recently to put a handle on the company’s debt of $4 billion. MGM’s reversal of fortune is probably attributable to the absence of blockbuster hits in the last few years. With declining receipts, cash from operations is hardly able to cover overhead and expenses needed to finish projects this year estimated at $175 million. MGM said in a statement that its creditors are allowing it to skip interest payments due at the end of September, October and November. Its next interest payment is due right after Thanksgiving on December 15. With a debt load of $4 billion, 10% interest per annum is $400 million a year or almost $34 million a month. So, for interest due for 4 months up to December 15, MGM would have to produce $136 million in 3 weeks. That is a lot of money for a business that’s losing money. Thus, some skeptical creditors have threatened to force MGM into involuntary bankruptcy.
How does involuntary bankruptcy work? § 303 of the bankruptcy code states that ‘An involuntary case may be commenced only under chapter 7 or 11 of this title, and only against a person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation, that may be a debtor under the chapter under which such case is commenced.’ It is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bonafide dispute as to liability or amount, or an indenture trustee representing such a holder, if such non contingent, undisputed claims aggregate at least $13,475 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims.
Contingent claims are not good enough to force an involuntary bankruptcy. Thus, if you are suing someone for $1.0 million, that lawsuit is a contingent claim subject to resolution by the court, and does not qualify you to join forces with 2 more creditors to force defendant into bankruptcy. On the other hand, bondholders are holders of undisputed claims, and any 3 of them owed more than the minimum cutoff amount lien amount may band together and force debtor into involuntary bankruptcy.
Analysts contend that if the assets of MGM were auctioned off now, they would bring in about $1.5 billion. Thus, in a liquidation scenario, creditors would lose almost two thirds or $2.5 billion, and stockholders would end up with nothing. Thus creditors agreed to a forbearance of the last 4 months of interest payments to allow MGM ‘additional liquidity as discussions continue regarding the development of an optimal capital structure.’ This is a nice way of saying that the company needs a lot more money generated in the form of capital because the company has too much debt and the movies coming out of the studio are duds. Is it possible that MGM doesn’t know what kind of movies people want to see now? The movie industry has always been a feast or famine business. If you hit a blockbuster you feast for a while. If there is no blockbuster for some time, it’s famine all around and begging for funds is the order of the day.
MGM is yet another icon of American business that is felled by too much debt following the footsteps of GM and Chrysler.
If you have too much debt, seriously consider chapter 7 to wipe them out, or be at the mercy of your creditors just like MGM.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
( Published November 28, 2009 in Asian Journal Los Angeles p. C4 )
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