By Ed Zwirn
Originally published on Nov. 14, 2010 in the New York Post.
As the MGM bankruptcy makes its way through court, equity holders in the fabled film studio may be taking a hit, but investors who provided debt financing when the company was taken over in a 2005 private-equity deal are apparently sitting somewhere over the proverbial rainbow.
The studio, which has given us movie icons from Dorothy to James Bond, has been struggling under the weight of massive debt even as its sole business, the making of feature films, suffers due to declining DVD sales and a broader weak economy.
But contrary to the widespread perception that private-equity takeovers bleed their target companies dry, the evidence seems to be that these deals have weathered the storms of the past few years as well as their public counterparts.
“Private-equity firms have managed the defaults of sponsored companies to generate average firm-wide recoveries in the upper 50% range, in line with recoveries for companies without private-equity backing,” writes Moody’s Investors’ David Keisman.
Keisman, who analyzed private-equity deals from 2008 through the end of October, says that the swapping of distressed debt and the use of bank debt have been “key supports” for recoveries in defaults of PE-backed companies. “These firms have weathered the storm as well as those lacking private-equity involvement.”
This appears to be the deal in the case of MGM.
The studio, which filed for Chapter 11 protection earlier this month, has said in its public filings that it expects to emerge from bankruptcy by the end of the year.
It is also not without valuable assets, having a 4,000-title film and television library including “The Wizard of Oz” and “Gone With the Wind,” which should continue to bring in revenue over the years.
The studio is due to appear Dec. 2 in US Bankruptcy Court, Southern District of New York, where it hopes to obtain approval of its plan to restructure some $3.5 billion of debt. This debt is to be converted into equity, giving holders most, or all, of the equity in the reorganized company, according to the plan.