Bondholders Could Derail Orion Deal

What a difference a conference call makes.

Just a week ago, billionaire John W. Kluge and Orion Pictures put forth a seemingly popular reorganization proposal for the troubled company that distributed such Oscar-winning films as “The Silence of the Lambs.”

Hollywood cheered the provisions for actors, directors, writers and technical specialists owed money by Orion. Wall Street analysts predicted that a resolution of Orion’s bankruptcy might at last be within reach--seven months after the company filed for Chapter 11 protection.

Indeed, Kluge’s concessions--including cash, loan guarantees and other unspecified terms--appeared to provide the salve for most of Orion’s ills. But by the end of what became a two-hour, coast-to-coast conference call last week, peace was no longer at hand.

Opposition to the deal came from Orion’s bondholders, who contend that the plan favored bank lenders and Hollywood creditors at their expense. The group voiced their objections in an angry phone conversation with Wilbur L. Ross Jr., the Manhattan investment banker who is advising Orion’s unsecured creditors, according to some participants.

As proposed, the bank creditors, led by Manufacturers Hanover/Chemical Bank, would receive 85% of the reorganized Orion’s cash flow. More infuriating to the bondholders is the fact that their fellow unsecured creditors--Hollywood trade groups and talent--would get 15% of the cash flow. For his concessions, Metromedia Co. Chairman Kluge--Orion’s majority shareholder--would receive 50.1% of the equity; Orion’s current shareholders would get .9%.

In contrast, bondholders would receive none of the cash flow, but 49% of Orion’s equity and a nine-year, $100-million zero-coupon bond that would pay no ongoing interest.

The reorganized Orion’s immediate task would be distributing 10 completed but unreleased films and marketing the studio’s 700-picture library.

But some of those affected by the reorganization proposal fear that holders of the bonds--issued by Drexel Burnham Lambert--will receive as little as 15 cents on the dollar. It is difficult to assign a precise figure, because Orion’s value is unknown.

“There was a feeling that they (the bondholders) did not come out of it as well as the others,” Ross said of the conference call. “ . . . Expectation levels had been pretty high.”

Still, Ross said he hoped that yet-to-be disclosed details of the Orion/Kluge proposal will help assuage those who are dissatisfied.

With a hearing on the proposal scheduled for next Monday in federal bankruptcy court in Manhattan, that will take some doing, according to bond traders and others who are watching the Orion bankruptcy.

For the tentative agreement to survive, it must be ratified by each class of Orion’s creditors, including the bondholders.

“I have yet to talk to anybody who is going to vote for this thing,” said a bond trader who asked to remain anonymous.

Orion’s 12% bonds maturing in 1998, which earlier this year traded for about 40 cents on the dollar, now trade for less than 25 cents. Orion stock closed at $2.25, up 25 cents, in New York Stock Exchange trading Friday.

If bondholders do not ratify the proposed reorganization, U.S. Bankruptcy Judge Burton R. Lifland could approve it himself through what is called a “cram-down” plan.

It remains to be seen if other creditors, particularly banks, would welcome a cram-down, because it may or may not lengthen the bankruptcy proceedings.

Perhaps not coincidentally, two companies that over the past months have proposed to acquire or merge with Orion are believed to be considering making renewed bids that could prove more attractive to bondholders.

New Line Cinema Chairman Robert Shaye said Friday that Orion “remains of some interest to us,” adding that without seeing the details of the plan offered by Orion and Kluge, “it’s difficult for us to say whether we are going to formulate any new proposal.”

Los Angeles-based Republic Pictures Corp. declined to comment on speculation that it too was considering proposing a deal different from the merger offer it unveiled May 7.

In any event, the discontent of the bondholders--who are owed some $300 million--threatens smooth ratification of the Kluge-endorsed proposal that was unveiled June 5.

Said Steven E. Hill, a securities analyst who watches Orion for Sutro & Co.: “Given the bondholders’ discontent, it’s extremely unlikely this (consensual bankruptcy reorganization) could go through as proposed. . . . It almost assures non-approval.”