“Word of mouth is the best publicity. Nothing beats it”. And considering the countless passages of Michael Jackson’s financial papers in so many hands and in such a short time, I feel having to start beginning the story in a fairy tale fashion.
‘Once upon a time’ Prescient, together with Perfect Circle, contacted Copper Beech Equity partners and explained that Michael Jackson was looking to refinance his debt. Copper Beech Equity partners contacted Transitional Investment LCC and told them that Mr. Jackson and his entities were looking to refinance particular credit facilities. Transitional had a preferred financing relationship with Fortress Investment Group. Fortress was a company specialized in distress debt and asset-based lending Investment.
Displaying the discretion of a jackhammer, this bunch of idiots (I cannot find a better word to qualify them) had meetings and phone calls with some of Jackson’s former advisors. A practice that ignored the strict caution guidelines Michael expressed, especially regarding Koppelman/ Branca and without informing him.
So, let’s trench on through because the events happened in chains that brought up suspicious numbers of “randomness.”
In December 2004, under the request of the group guided by Prescient, Transitional provided a letter of intent (LOI) for a first bridge loan to be used to close the relationship with Bank of America, and a project fitting Michael Jackson’s desire to exercise the buyout option and purchase the 50% of Sony/ATV owned by Sony Music. The aggregated amount was 537.5 million dollars. The initial LOI referred to a senior secured credit facility for $420 million, the percent subordinated note for $80 million, and a redeemable convertible preferred stock for $37.5 million.
On February 1st, 2005, the LOI became a commitment letter for bridge financing. The commitment letter now being presented by Transitional Investors LLC as a joint venture partner of Fortress Investment Group.
Between January and February of 2005, Transitional met with the accountants, reviewed the financial statements, and evaluated the condition and the obligations of Michael Jackson, including his income and expenses. The result was the below report:
From the documents, it appears immediately an agreement between Transitional and Fortress Credit Corp, represented by Chief credit officer Constatine Diakollas. The reason for the bridge facility was an entirely expected refinance of this preponderance with a comprehensive package that included providing financing for the acquisition of the other half of the Sony/ATV library. The commitment letter and the term sheets have three components: Senior bridge loan of 207.5 million, a subordinated bridge loan of 80 million, and preferred bridge stock of $40 million.
They initially wanted Michael Jackson to sign it. But between the various handlers, there was concern that there would take an extended time for him to sign another piece of paper that he would want to be explained. Then, accordingly, they kept as good the signature what they understood to be the advisor to MJ Publishing and Michael J. Jackson. Don Stabler.
Here now comes the beauty: from his testimony, Transitional Managing Director Mr. Shelley confirmed to having talked to Mr. Branca to explore the financial condition of Michael Jackson.
Structure and put in place that kind of refinancing package, would have taken some time that MJ did not have. BOA threatened to call the note, and such an event could have triggered a potential sale of assets. The group of handlers requested to put together and immediate refinancing for the credit line, On March 25, Transitional/Fortress presented a new LOI.
Clearly, their interest was not just lending money to Michael Jackson to allow him to recover and to pay off his obligations; In fact, that loan would be upside down, so they structured an investment, which would not usually have done, that would allow them to also participate In the future contemplated transaction which was the buying a partial interest in the Sony/ATV through several different operations.
On April 6, Jackson and Tom Mesereau attended Johnnie Cochran Funeral. There they found friends such as Reverend Jessie Jackson and supermarkets mogul Ron Burkle.
MJ was reluctant to the whole situation, and opened up with them regarding these financial transactions. He asked Mr. Burkle to help and revise the papers. It resulted in suggesting to MJ not signing the commitment and consequently taking all the duly actions with BOA blocking all authorization previously made to represent him except for his brother Randy Jackson and Mr. Burkle company.
The handlers supposed to have Michael sign the deal. Instead, there was an unpleasant discussion that ended with MJ invited them to get out of Neverland. When they left, Michael’s assistant phoned and told them to go and meet with Ron Burkle. The discussion was around the meeting and had to do with the Fortress deal and why they thought that was a good deal for Michael. Burkle told them that he didn’t believe that Fortress would be able to do such a deal because they didn’t have the money.
Michael was also supposed to signing off on loan secured against the Hayvenhurst property. In this regard, Mr. Burkle’s and his attorney Mr. Mortensen felt they could do better due to the interest rate being charged on that loan was too high. Still, considering there was not enough time to set up the loan documents, they could not provide financial information to have Michael’s FICO score generated, the right solution was to take what they had already opened.
As necessitated by the emergency, Mr. Burkle lent money to Jackson in a few days. He forwarded the cash to Allan Whitman’s account on MJ behalf, and bills could be paid. Mr. Burkle advanced over a half-million dollars without asking any type of guarantee. Jackson immediately reimbursed Burkle as soon as the funds were credited.
Meanwhile, Transitional worked on the refinancing documents with Fortress lawyers. On April 18, Fortress sent to the old group of handlers a 92 million Senior secured loan commitment and 3 million secured option purchase.
I insist on explaining the flow of events before the refinancing cause we are faced with what in finance is called by definition, predatory lending.
Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative, or unscrupulous actions. If it is not clear enough, I’ll give you an example: predatory lending practices triggered the subprime lending crisis in the United States and global recession. If someone from your friend lost his house after 2006, you have to thank these kinds of financial companies.
Within the negotiations, the transaction comprehended a 1.5% to Fortress upon the commitment letter’s execution. 1.5% was on Prescient, for its role as advisor. And in case Jackson would not use the facility or some alternative financing were completed within a specified period after the agreement had been signed, a break-up fee of 1 million would have to be paid to Fortress. In short, if Michael Jackson signed this letter of commitment with Fortress and not get into financing with them, he would have to pay 1 million still to compensate the financial institution for the use of their stationaries. The offer nullified all the previous ones but did not include the obligation to pay the 9% break-up fee as liquidated damages, as outlined in Section 6 of the letter dated December 30, 2004, (which 9% break-up fee is comprised of a 2% break-up fee to be paid to Fortress and a 7% to be paid to Prescient as advisor). Fortress agreed to fund $3,000,000 before April 30, 2005, against an option to purchase 51% of Michael Jackson’s beneficial interest in the MJ/ATV Publishing Trust for $175,000,000. The validity of the offer was 90 days. Crook behavior? Definitely. You can read the whole document here.
Here the compensation formula developed by Lehman Brothers in the ’60 for investment banking services related to the finder fee that financial brokerage companies used at that time.
-5% of the first million dollars involved in the transaction
-4% of the second million
-3% of the third million
-2% of the fourth million
-1% of everything thereafter (above $4 million).
Despite Lehman was and still is the most common form in use, this does not mean that rates are not still negotiated on a case by case, particularly for $100 million and higher transactions. Serious brokers take 0.25% of the whole loan.
Something was off with that financing, and Michael Jackson did not sign the commitment letter. All the conversations with Fortress ceased as soon as Yucaipa Company controlled by Ron Burkle, got involved with Michael Jackson. Fortress conversations with them began after the purchase the loan from BOA. In fact, Fortress had other surprises in its sleeves.
Unexpectedly, the first week of May 2005 the Media announced Fortress acquisition of the Bank Of America’ Michael Jackson loans leaving the handlers high and dry. It came out of the blue even for Jackson. Prescient’ people read it in the newspapers and alerted Transitional.
During his testimony, Shelley was asked if any sort of complaint had been addressed to Diakollas. He admitted he asked: “Don’t you think you owe us at least our fee for the purchase under our agreement, our joint venture agreement?” Diakollas went through the preamble, and responded, “I thought we had a better relationship than that this. That’s right? Other people, not you, showed us the deal.”
Diakollas was correct. The proposal came out from another source: it came nothing less than from Jane Haller, Michael Jackson personal banker.
Fortress intentionally withheld from Mr. Jackson any written agreement between the Fortress entities and Jackson’s entities and did not tell anyone that it was negotiating with Bank of America the loan purchase. As already explained, Fortress was still in active negotiations with Michael Jackson and his people concerning the $92 million loan facility on April 17th and 18th. Yet, by May 3, they executed assignment and assumption agreements with Bank of America.
- What was going on during those two weeks between April 18 and May 3? It’s possible that Fortress thought, “Well, if we hear from Bank of America, maybe we will just buy this loan directly?
- What were all of the reasons why Fortress didn’t tell MJ that it was in discussions with Bank of America to take an assignment and assumption of his loans?
Fortress defended the subject by saying they signed a confidentiality agreement with Bank of America. But they also had entered into a confidentiality agreement with Michael Jackson. So it was just inappropriate not to tell him that they were trying to buy his loans.
In the end, Michael Jackson was the one that received a “hello” letter that basically says: “Hello, Mr. Jackson. You owe us something million dollars. You don’t owe the Bank of America anymore. We have purchased the debt, and here is some information for the current status and some further pieces of information that we require from you”.
Some other factors might have motivated Fortress business decision to pursue the purchase of the BOA loans directly from BOA. In fact, in April 2005, MJ needs to cap off a relatively small interest payment of about 600’000 dollars due on the credit line with Bank of America, and funds were not available to cover it. As a result that Bank of America called the note to actuality accelerate the default. At that point, MJ was “technically” in default with the bank.
MJ was under criminal trial, and all his cash, when available, served to pay defense experts, apartments of the lawyers, and the employees that had to live in the area at the time.
The technical default of the credit line was triggering a mechanism that competitors were waiting for years, any of them with their own reason. Still, all with the same intent: divest MJ from intellectual property ownership. Like Koppelman with the revised offer of Goldman Sachs, Branca, with two different offers and Sony, that drove the bank actions behind the curtains, waiting for the step that, in the end, would have brought to bankruptcy procedure.
Fortress’s handy and straightforward solution to purchase the loan directly rather than bid against anybody else or continue to negotiate something according to the commitment letter that was existent and issued by them with MJ while entering the confidentiality agreement had been a winning move. That what Mr. Burkle suggested that happened. Whether that’s plausible or not, the reader can decide it.
However, the Fortress purchase was not a refinancing yet. They had to find a bank to pay the loans to Bank of America.