MGM in Crisis: Stalemate with Bondholders

Company needs new $20 million in cash in the next two months — and another $130 million or so after that — to stay afloat.

The heated emergency shareholder meeting at MGM led by Stephen Cooper and Mary Parent on Thursday ended in a standoff between studio management and equity and bondholders in the company.

As a result, MGM as a viable company now hangs in the balance.

Cooper, the new co-CEO (who by the way blamed his predecessor Harry Sloan for miscalculating the projected numbers), told the 40 or so on the call that the company needs new $20 million in cash in the next two months — and another $130 million or so to be raised after that — to stay afloat. And he asked the bondholders to forebear on interest payments on the debt that they hold.

In other words: Cough it up and give up your rights. Or else your investment will be worthless.

But the equity- and bondholders weren’t biting. In fact, they’re barking pretty loud.  

Here’s how it boils down:

Management needs immediate cash. But equity holders already have poured cash into the company and have seen the value of their investment plummet. (Both Sony and Comcast, 20 percent investors in the studio, have already written the investment off their books.)

The bondholders, led by Don Bobbs of Stark Investments, were also unconvinced.

Bondholders are invested in debt and have no real incentive to put up any cash at all. If MGM were to go bankrupt, they would be repaid first and would be likely to recoup most of their money that way.

So they argue: Why is bankruptcy not an option?

Cooper, as detailed in this news article, told the group of several dozen equity holders and bondholders that the company would be worth far more if they keep it afloat.

But many at the meeting challenged Cooper on his logic: He argued that the company would be worth little in bankruptcy – meaning its assets wouldn’t raise much cash – but he simultaneously argued that the company would be just fine and continue to grow if they would put in the short-term investment of $20 million cash.

They called that a contradiction in terms. “They’re saying, ‘Give us money because we can grow the company,’ but at the same time they’re saying, ‘If we go bankrupt, the company has no value.’ How does that work?” said one person present at the meeting.

With the bondholders having no incentive to either relinquish interest payments or put up cash — and with the equity holders notably silent –  “it’s a game of chicken. A stalemate,” said the person present at the meeting.

Meanwhile, the investors also blamed MGM for failing to make successful movies up to now — and “Fame,” which opened this weekend, does not appear likely to change that impression.

Finally, the equity and bondholders challenged Cooper on a plan to fix the studio. "Everyone asked, ‘What's the work-out plan?’ And there is none."

A spokeswoman for MGM declined to discuss the proceedings during the meeting but issued this statement:

"Our discussions with lenders are one step of many in a proactive and ongoing process to correct MGM’s balance sheet and position the company to fulfill its business objectives. MGM’s leadership is aggressively pursuing a course of action that is in the best interest of the company and its stakeholders, and that includes working closely with our lenders to arrive at a solution that enables MGM to achieve long-term financial success. MGM confirms the production commitments we made when we announced our new leadership structure in August.”