On November 3, burdened by approximately $5 billion of debt owed to a group of lenders with interests in its most meaningful asset, its massive library of films, Metro-Goldwyn-Mayer — the venerable studio that brought you such classics as The Wizard of Oz, Ben Hur, andSinging in the Rain — filed for bankruptcy.
For most people who weren’t interested enough to read past the headline — or who were scared away by the ceaseless puns about “the lion in winter” (appropriately, an MGM film) and “the lion’s roar” — the images that may have come to mind probably involved forcible removal of office furnishings and the iconic MGM Tower looking like a giant, glass-and-steel, boarded-up Blockbuster Video (a banner swaying in the L.A. breeze declaring “Every Unreleased Picture Must Go!”). The reality, of course, is completely different and far more mundane. [Ed. Note: Except, perhaps for one thing: this morning's Hollywood Reporter reports that MGM is paying a "one-time fee" to break its lease and vacate the MGM Tower after all. The studio is moving to a fancy new building in Beverly Hills, which is itself currently the subject of a dispute between the landlord and William Morris Endeavor, which was to move into the building prior to the WMA/Endeavor merger.]
MGM didn’t close its doors on November 3. And no, you cannot acquire worldwide distribution rights to The Return of the Pink Panther at yard sale prices. Instead, after months of protracted negotiations, MGM filed a so-called “pre-packaged bankruptcy,” promising to be up and running within a month. And, lo and behold, on December 2, a Manhattan bankruptcy court approved MGM’s Plan of Reorganization, effectively re-releasing the lion into the wild (I made fun of puns in headlines; I made no promises about body text).
Of course, unless you’re a film-loving bankruptcy lawyer, you are probably left scratching your head about the events of the last month and a half. Luckily, you have me — a film-loving bankruptcy lawyer — to help sort this all out. In three easy questions:
1. What the #&$% Just Happened?
MGM’s lender group became the new owners of the company, thus magically removing $5 billion of debt from the company’s balance sheet. Executives from Spyglass Entertainment are now the new management.
2. What Is a Prepackaged Bankruptcy Anyway?
A “prepack” (just in case you are into bankruptcy shorthand — and who isn’t?) can actually mean a few different things and have a number of different variations. But generally it refers to a situation where most of the major constituents, management of the company, its secured and unsecured creditors, bondholders, shareholders, and new investors/lenders are able to reach an agreement outside of a bankruptcy. They then use the bankruptcy to have the agreement blessed by a bankruptcy judge and to make it binding on anyone who didn’t agree.
3. What Makes This Bankruptcy Case Unique?
A number of things make this case stand out. Here are just a couple.
First, less than 30 days from filing of bankruptcy to approval of a Plan of Reorganization is incredibly fast. If it’s not a record, it should be. American Media, the parent of the National Enquirer, filed a pre-packaged bankruptcy on November 1, and has said that it is shooting to emerge from bankruptcy within 60 days. We’ll see what happens.
Second, not every Chapter 11 bankruptcy case, nor every pre-pack, results in unsecured creditors being paid in full. In fact, it is much more common for unsecured creditors to receive some (sometimes very small) percentage on the dollar and occasionally a small equity piece in a reorganized company. One of the reasons that MGM’s case was able to move so quickly through the process was the agreement to pay all unsecured creditors 100% of what they were owed. (And if you don’t believe the unsecured creditors are doing unusually well in this scenario, try Googling the phrase “‘unsecured creditors’ and screwed” and browsing through the 37,600 results.)
In the right circumstance, a pre-pack can be a very successful way to avoid the typical slow-moving Chapter 11, while still accomplishing a restructuring of a company. (In fact, as early as November 2008, analysts and government officials were bandying about “pre-pack” proposals which, had they been adopted, may well have spared you from inadvertently becoming part of the controlling shareholder group of a certain once-proud American car company when it finallywent bankrupt anyhow.) When, as here, the parties recognize in advance that there is an achievable outcome that will allow the company to stay in business and move forward, a pre-pack can avoid the administrative burdens of being in bankruptcy and get to the bottom line result without wasting any time.
And if he wants, the bankruptcy judge can brag at holiday parties about holding the lion in his bare hands — and allowing it to live.