Digital Domain financing, bid procedures grudgingly approved by judge

By Jim Witters

Wilmington, Del., Sept. 12 - Digital Domain Media Group, Inc. won interim approval for $11.79 million in debtor-in-possession financing, including an emergency OK for $4.137 million to meet this week's payroll, during a Sept. 12 hearing in the U.S. Bankruptcy Court for the District of Delaware.

Judge Brendan L. Shannon also approved the company's proposed bid procedures, naming Searchlight Capital Partners LP the stalking horse bidder in a proposed $15 million asset sale.

But none of it came easy, as Shannon and others raised concerns about the accelerated timeline for the sale, which calls for a sale hearing on Sept. 24.

And the DIP financing remains unsettled, with attorneys pledging to negotiate into the night to work out provisions suitable to the lenders - a group of senior noteholders led by Hudson Bay Master Fund Ltd. - after Shannon stated that his approval of the financing is open for reconsideration at a Sept. 20 hearing.

Throughout the 7.5-hour hearing, Shannon voiced his displeasure at being presented with a take-it-or-leave-it deal by both the stalking-horse bidder and the DIP lender.

"I don't offend easily, but you've managed it," Shannon told the attorneys in the courtroom. "This deal has only a passing relationship to what happens in a bankruptcy court."

The judge said he was troubled and frustrated by the terms and conditions of the timeline in the DIP facility and the sale procedures.

But the lenders proved intractable, and denying the motions would have meant Digital Domain would have closed Sept. 13, leaving 750 workers unemployed.

The company had about $40,000 in the bank on Sept. 12 and is accruing operating expenses of about $600,000 a day, according to FTI Consulting senior managing director Michael Katzenstein, who is serving as chief restructuring officer.

Katzenstein said that if the DIP financing was rejected by the court, he would immediately seek to convert the case to Chapter 7.

Judge's concerns

Shannon said the timeline embodied in the DIP, which he said calls for the quickest sale in his experience.

He said he is required under the bankruptcy code to ensure that the official committee of unsecured creditors is formed and has an opportunity to review and object to any provisions of the financing and the sale.

Shannon also said he fails to understand the urgency of the lenders and buyer in moving forward with a sale and closing so quickly.

Debtors attorney Robert J. Feinstein and three witnesses said that Digital Domain's business is entirely dependent on business from the six major motion picture studios.

The company provides special visual effects, and its past titles include Titanic and Avatar.

John Turitzin, vice president and chief counsel for Marvel Entertainment, LLC, testified that his company had pulled a major project from Digital Domain and was giving the company only small jobs that could be completed within a few days.

The company's insolvency and uncertain future gave Marvel executives trepidation about Digital Domain's ability to continue to meet the strict deadlines associated with the movie-maker's production schedule, Turitzin said.

Shannon, though, questioned that position.

"They are still in business. They are still doing work for you. I can't understand your thought process," Shannon told Turitzin.

Under cross examination by an attorney for Palm Beach Capital, the largest shareholder and a lender, Turitzin testified that if Digital Domain emerges from bankruptcy with a financially sound operation, Marvel will likely award major projects to the company in the future.

When Shannon suggested pushing the sale hearing to Oct. 2, the DIP lenders said they would withdraw their offer.

Shannon asked why eight days would make that much difference and why the visual special effect business is unique.

Katzenstein, Feinstein and lenders' attorney David M. Hillman said the relationship with the six major movie studios was so fragile and the competition so fierce that Digital Domain's business could disappear in that short time, ruining prospects for emerging from bankruptcy as a going concern.

"I am not entirely satisfied that you answered my question," Shannon said.

He said he has dealt with oil companies and automobile manufacturers.

"There are many industries dominated by a few large companies, and we haven't had this kind of procedure," he said.

Bid procedures

Digital Domain has entered into an agreement under which Searchlight Capital would acquire Digital Domain Productions and its operating subsidiaries in the United States and Canada, including Mothership Media, for $15 million.

The sale is subject to the receipt of higher and better offers and court approval.

The bid deadline is Sept. 20.

An auction, if needed, will be Sept. 21.

The sale hearing is scheduled for Sept. 24.

If Searchlight is not the high bidder for the assets, Digital Domain will pay it a $375,000 breakup fee and reimburse up to $375,000 of its sale-related expenses.

The lenders also would pay an additional $750,000 breakup fee if Searchlight is not the successful bidder.

DIP terms

The total DIP financing facility is $20.08 million.

The DIP lenders are Tenor Opportunity Master Fund, Ltd., Tenor Special Situations Fund, L.P., Parsoon Special Situation Ltd., Hudson Bay Master Fund Ltd., Empery Assert Master Ltd. and Harz Capital Investments, LLC.

The lenders will receive a 5% origination fee, based on the full amount of the DIP, plus a rollup of their prepetition loans to the debtors.

Interest will be 12%, paid in kind.

The DIP loan will mature on the earliest of Dec. 31, the acceleration of the DIP loans and a motion for dismissal or conversion of the Chapter 11 case.

Digital Domain, a Port St. Lucie, Fla.-based media company, filed for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on Sept. 11. The Chapter 11 case number is 12-12568.

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