Michael Jackson’s Refinancing Assets? Ok: We want Everything You Own.
How and why Michael Jackson corporate investment loans with Bank Of America ended up in the hands of a company specialized in distressed debts and risky investments such Fortress Corp. Michael Jackson assets were NOT overleveraged entities neither at risk of impending bankruptcy. But it is evident that someone or something was actively working behind the scenes to bring his assets in those conditions.
A couple of blogs ago, I described the unpleasant chain of events happened to Michael Jackson through all 2005. At the beginning of January 2006, the situation was pretty much the same. Michael’s new middle eastern advisors were actively looking for solutions to close the loop around useless meeting and relevant postponements that seems very much an excuse to drive MJ to the point of no return: bankruptcy.
Michael Schumacher and Michael Jackson in 2006 in Bahrain
The refinancing obstacles for Michael Jackson assets
In January 2006 Mr. Zu’bi with two others MJ’s financial representatives of Omni met with Fortress and Sony at Sony headquarter in New York. On that occasion, they concluded that there was a need for New York counsel to be brought in on the borrower side. There when White& Case, came in. Until that time with the exception of the documents in connection with the assignments of the Bank Of America loans and the short terms forbearance papers, Fortress had made no effort to present to Michael Jackson a concrete plane of refinancing.
When Fortress was asked to put forth a financing proposal, most of their guidance line of terms actually came from Sony exec Rob Wiesenthal, who insisted to keep the collaters assets pledged as per the Bank Of America loans (50% of Sony/ATV interest, Mijac catalog, Neverland & MJ personal guarantee).
The result was that Fortress was a higher interest rate proposal by at least a couple hundred basis points of what was then proposed by Citigroup. It also included a right of Fortress to buy part or all of Michael Jackson’s interest in Sony/ATV in case of loan default (actually, it would have been absolutely the same. In case of default, MJ music assets would have gone in Sony hands straight as a registered mail). Meanwhile, Mr, Zu’bi, of AQ Business Consultants, invited bids from financial institutions to refinance the Bank of America loans and various groups expressed interests in getting into business with Michael Jackson.
- An investment group owned by the government of Dubai, called Istithmar, expressed immediate interest in providing Michael Jackson with the necessary refinancing in exchange for his interest in the Sony/ATV. However, the deal collapsed due to Sony’s objections. That tells us that Michael was more than open to selling his ATV catalog or a portion of it. It was Sony that didn’t want new shareholders.
• On the other side Fortress with the Right of Last Offer condition, blocked a proposed deal with UK-based Cheyne Capital in early January 2006.
Villiers Terblanche, a representative of White & Case describe during a deposition Sony inappropriate behavior and – still around while he got his initial debriefing of the transaction. Sony people at different points, came in to pick up their bags and their documents, so they had to stop the meeting – Abmed Al Khan, CEO of Dune Holdings together with Omni was principally responsible for the financial aspects of the restructuring on behalf of the various Jackson entities involved in the transaction.
These coming and forth – due to the lack of collaboration of Sony and Fortress – resulted in the need to extend the forbearance period until February 18, 2006. So Michael Jackson’s financial situation incurred substantially more liabilities, including liabilities arising from his delay in obtaining the necessary financing. But at that point, AQ was able to obtain Citigroup’s interest through a commitment letter and term sheet. And among the others offers, it was the best.
The Citigroup Proposal
After the Fortress non-binding term sheet in front of Jackson’s representative and Sony, a couple of weeks later the Citibank proposal came across their desk. Fortress had a period of time during which they had to determine whether or not they wanted to match the Citigroup financing, as was their right, and at the end, they decided to align with it.
In short, MJ came nearly to signing onto closing with Citibank; and then around February, Fortress purported to exercise a right of last offer, which basically gave them the right to match any refinancing on substantially the same terms and conditions.
Contrary to Fortress, the Citigroup offer was a serious structured financial project. Michael’s signature on the documents was already arranged through Mr. AI Kahn office. As of January 26, 2006, Citigroup was the potential lender to the trust in connection with this refinancing arrangement they have planned.
Citigroup proposed a “bankruptcy remote” structure to refinance the Bank Of America loans to which the assets of the MJ Trusts would be conveyed in return for the beneficial ownership of the new trust. Citibank would then loan to the newly organized trust $300 million, secured by the assets conveyed by the MJ Trusts to the newly organized trust. The proceeds of the loan would then be distributed to repay the existing indebtedness of the MJ Trusts under the BOA Loans.
Citigroup specified that Sony and its affiliates had to pay the “guaranteed advances” and that in the event of a sale procedure third party offers were acceptable. The project also had taken out the negative covenant – that was the main worry during the Bank Of America financing – defining “ no Event of Default “the failure of the borrower to pay interest when due or accrued upon the occurrence of a default attributable to any net or omission of SME, Sony/ATV or Sony guarantor, (any such approval in clause or above not to be unreasonably withheld or delayed). In short, the MJ entities would be risked no more defaulting the loan if Sony wouldn’t have paid or would have a delay to execute the due payments into Michael Jackson accounts.
The structure of MJ Group entities changed as per these below tables:
It must be clear that Fortress is not a bank but a sort of financial group acting as the main contractor and purchasing credit lines from banks, then re-selling them to its customers at a higher interest rate. In this case, Fortress was “placing a bet” on Jackson’s debts; it specialized in distressed debt, typically associated with overleveraged entities or those at risk of impending bankruptcy.’ This firm and others like it “are designed for wealthy investors looking for big returns on riskier bets.”
Distressed debts are risky investments, but it has considerable profit potential, either in the event of the entity’s turnaround or because, in a lend-to-own strategy, the investor would acquire the asset should the debtor fail. In Fortress’s case that meant a chance at owning Jackson’s share of the music catalog. Fortress’s acquisition of Jackson’s debt was a risk so replete with profit potential that – after Michael death – an analyst questioned Bank Of America’s “wisdom” — not for continually lending to him but for removing the loan from its books. In fact, Michael Jackson assets were NOT overleveraged entities neither at risk of impending bankruptcy. But it is evident that someone or something was actively working behind the scenes to bring his assets in those conditions.
- What were the reasons that moved Fortress to comply with a substantially conventional structured finance transaction?
Apparently, they didn’t want this lucrative and over-collateralized deal to sneak from them but – having read the extensive depositions from all the sides – I have some concerning about the Sony guidance and suggestions”source”.
The Citigroup project structure, – re-establishing a decent interest rate for MJ entities – had a risk-adjusted rate of return and based on the risks associated with the transaction, it provided an “appropriate” return.
- The return is the interest rate and the points that were charged on the loan.
- Risks assessing: the unique risk in this transaction was the chance of not getting paid back due to an event of default.
- Risk covering: having determinate that the collaterals over-covered the loan value, the return side was balancing the probability of getting repaid in full or getting repaid with or without a default and whether or not the interest rate and points were getting compensated.
But if we compare the return of the two proposals:
there no need to go into further details to notice that actually, the return was just not very interesting for a loan sharks entity like Fortress. That’s why I’m pretty sure there are other reasons behind the acceptance of a conventional – in line with market standard – offered such the Citigroup. However, I don’t want to bore more than what I’m already doing. I just add that the loan had been syndicated in post-closing. That means that there were other participants in the financing (real banks).
On February 14, 2006, Fortress informed MJ by fax about the second forbearance extension and that they were going to exercise their first right offer by matching the Citibank project. Originally the closing of the refinancing was on March 2nd; however, due to complex open issues, included of the creditors’ identifications, as well as establishing the clearance of all the titles in MJ assets being used as security, the date was postponed.
The Branca UCCs
During the course of its due diligence process with respect to the refinancing, Fortress was already aware that on September 27, 2005, John Branca, a former attorney of MJ had filed UCC Financing Statements against the MJ Trusts, claiming an interest in the assets. Given the fact that Branca appeared as a secured creditor of MJPublishing Trust, Fortress was uncomfortable with completing the refinancing and restructuring of the Jackson Entities’ debt. In fact, settling the Branca claim was an important precondition for the refinancing to close because it directly affected the collateral being used as security.
- A UCC-1 financing statement (abbreviation for Uniform Commercial Code) is a legal form that creditor files to give notice that it has or may have an interest in the personal property of a debtor. This form is filed in order to “perfect” a creditor’s security interest by giving public notice that there is a right to take possession of and sell certain assets for repayment of a specific debt with a certain priority. Such notices of sale are often found in the local newspapers. Once the form has been filed, the creditor establishes a relative priority with other creditors of the debtor.
For some reasons (or in order to join the “bankruptcy club,” that will be touched later on) Mr. Branca asserted he had “membership interests” in Sony/ATV and MIJAC Catalog for about 50 million and such 4.5 million plus interests to be paid to him by Sony Corp – in case they would success to foreclosure & bankrupt MJ during the period of Fortress refinance – Mr. Branca’s claim specified that – if the amount collected in the bankruptcy proceedings would not have had enough balance to pay his allegedly 4.5M – he would get the money in installments from Michael Jackson’s royalties up to March 2008.
Actually, Mr. Branca had an agreement as an agent with MJ since the ’90 that allowed him to take an overall 5% over Michael Jackson whole business. In addition to it, he was one trustee on MJPT trust. Normal practice on fiduciary business. What is is strange here is that he still had had a signature over there; when MJ had him fired in 2003, was asked to resign from all the MJ trusts and return all the legal documents. Actually, he resigned in MJ/ATV trust but nobody cared to check if he was out from all the other entities. Here Michael Jackson answers concerning his the trustees in connection with his trust entities: The matter was followed by White and Case and the unpleasant story was liquidated and settled on April 13, 2006, with the principal amount requested by Mr. Branca such 13.5 million representing a number of alleged unpaid legal services to his law firm and a mutual release agreement to give back ALL Michael Jackson legal documents. However, that meant to mortgage Neverland again. Fortress didn’t want to enlarge the still overcollateralized loan with additional 20 million and they opened a separate procedure.
Finally, the 24 months Fortress refinancing was in place and disbursed as well on April 13, 2006, although it didn’t solve Michael Jackson problems. The MIJAC catalog was still linked to the whole loan package and potentially at the mercy of Sony…
- Anyone interested in reading the depositions can send me an email