Rhythm & Hues Stalking Horse Bidder Approved by Bankruptcy Court Judge

If no other bidders emerge, South Korea's JS Communication Co. will assume control of Rhythm & Hues

A U.S. bankruptcy court judge has approved a plan to have South Korean media company JS Communication Co. serve as the stalking horse buyer for Rhythm & Hues Studios, a spokeswoman told TheWrap.

The El Segundo-based visual-effects company filed for Chapter 11 protection last month, reporting that it has  $27.5 million in assets and roughly  $33.8 million in liabilities.

In bankruptcy cases, a stalking-horse bidder is selected from a pool of bidders so a financially distressed company can ensure that its assets are not undersold at auction. If no other bidders emerge, JS Communication Co. will assume control of Rhythm & Hues.

Under that scenario, JS Communication Co. would pay back $15.5 million in loans from two of Rhythm & Hues' customers, 20th Century Fox and Universal, and will pay an additional $1 million in cash for the company.

After filing for bankruptcy, the company secured millions of dollars in bridge loans from Universal and Fox, so it could continue working on a handful of film projects. It received an additional $5 million loan from Legendary Pictures, but it was not clear how that money will be paid back.

Not everyone is pleased by the plan laid out by the visual-effects studio. A committee of the company's unsecured creditors objected to Rhythm & Hues' proposed auction process on Thursday and to the bridge loan from the two studios.

In an objection, the unsecured creditors claim that the terms of the loans ensured that Fox and Universal will get their film projects completed despite the company's financial difficulties and are first in line to be repaid.

"It is clear what Fox and Universal are getting out of the DIP Loan," the filing reads. "Their projects will be completed, and then they will be at the front of the line to be repaid. It is not at all clear what other unsecured creditors are getting."

The committee of unsecured creditors argue that they would have had a better chance of recovering their money if Rhythm & Hues had been liquidated.

Under the terms approved by the court, Rhythm & Hues will conduct an auction on March 27.

If JS Communication Co. is outbid it will receive a break-up fee of $425,000.

Pamela Chelin contributed to this report.