MICHAEL JACKSON’S 2006 REFINANCING ASSETS: THE SONY/FORTRESS OBSTACLES

At the beginning of January 2006, while media carried on to portray Michael Jackson’s apparent fluffy life, splinted between marriage invitations and shopping binge, his middle eastern advisors were actively looking for solutions to close the loop around useless meetings and related postponements that seemed very much an excuse to drive MJ to the point of no return: bankruptcy.
Bahrain-based financial adviser Ahmed Al Khan and Omni representatives were principally responsible for restructuring financial aspects on behalf of the various Jackson entities involved in the transaction. Five groups expressed interest in getting into business with Michael Jackson: Cerberus, Cheyne Capital, Citigroup Global Markets, Goldman Sachs, and Fortress.
Until that time, except for the documentation assignments with Bank Of America loans and the short-term forbearance papers, Fortress made no effort to present a concrete refinancing plan to Michael Jackson.

After the previous tentative of refinancing and sale collapsed with Dubai’s own government company Istithmar, due to Sony’s objections, Fortress blocked a proposed deal with UK-based Cheyne Capital with the right of last offer condition in early January 2006.

Mr. Zu’bi, with two other MJ’s financial representatives, Gaynell Lenoir and Frank Correa 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.

Villiers Terblanche, of White & Case LPP, described during deposition of Sony people’s inappropriate behavior that was 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. During the deposition, Attorney Terblanche felt to point out this: “Can I just point out, I don’t think, I may be wrong about this, but I don’t think the original financing, meaning the old Bank of America financing, was with Mr. Jackson himself. He was ultimately added as a guarantor, correct to point out; I think that he was–He may not have been a borrower, to begin with”, which confirms that the initial project of an investment loan to support Sony/ATV expansion. 

 AQ was able to obtain Citigroup’s interest through a commitment letter and term sheet Citigroup’s stake. And among the other offers, it was the best. When Fortress was asked to put forth a financing proposal, most of the guidance line of terms came from Sony exec Rob Wiesenthal, who insisted on keeping the collateral assets pledged as per the Bank Of America loans (50% of Sony/ATV interest, Mijac catalog, Neverland & MJ personal guarantee). The value of Jackson’s collaterals was the ballpark of the total refinancing loan, and Fortress was not competent in the field. I ‘m going to summarize part of the testimony of Daniel Groppel, who was the managing director of Fortress at that time and supervised all the transactions.

There was no specific value in the catalog, other than saying that Mr. Jackson’s interest in Sony ATV exceeded the value of both loan facilities. The catalog is an income stream, and royalties are collectible for what is in the catalog. Music royalties have been bundled together and valued in the past, but different types of catalogs trade at very different types of valuations.  It was challenging to put a value on the Sony/ATV catalog because there had not been a music catalog like Sony/ATV, so it would be difficult to say with any level of precision that the catalog is worth X or 1.5 X because it was such a valuable asset that someone would have paid a premium for it.

And the full potential exploitation of MJ assets was the central point for Fortress connected with this financing. They knew that there was a way to value and even sell that music royalty stream; they knew that bonds tied to music royalties were valued and sold as futures. It had been done in the Bowie context and other artists. But they could not focus on valuing this collateral with the securitization that had occurred previously concerning music royalties, which was among other things, a work done by  Mr. Koppelman for various artists but not for Jackson, who had paid him 1 million per year for two years to have “the nothing” but an offer that did not suit his requirements. 

Mr. Joe Lee of Fortress, who had some knowledge in the field of music catalogs securitization, confirmed that it would be complicated to put a value on this catalog. Traditionally music catalogs trade in a range of 10 to 15 times NPS, which it’s some kind of income stream coming off of a music catalog, but Sony/ATV catalog might have been inside or outside that range because of Sony’s control due to the agreement with which Sony operated the catalog and the fees that get laden onto the asset.

Fortress made the decision, based on a range often to times NPS, adjusted for those factors, that the loan would be comfortably covered. setsTen to 15 times NPS in this context, gave the gross number NPS $115 million, which would have been a billion to a billion six hundred-ish.

Fortress valued at the minimum of a billion gross value for 100 percent of the Sony ATV catalog for the very significant difference of this catalog between NPS and cash flow because Sony charged the ATV entity much money to manage. Sony ATV had about $250 million of debt on it, at the corporate level. It also had much cash, around $100 million-plus, some of which was being distributed to Sony.

With these numbers, anyone could think: “put the cash aside, it would be whatever value you put on the ATV catalog less than $250 million of debt,  times 50 percent plus the $100 plus million of cash.”

Well no: a lot of that cash was being distributed, cucked out to Sony and Mr. Koppelman and many other people, many executives knew a lot was going to Sony.

The method used for calculating this point was to take the low end of the range, which generally banks do,  which was one billion dollars, take away 250, which gives 750, and half of that is 375.

Sony was sucking all that money off the top, that $250 million of corporate debt plus the cash distributed at their own discretion, legit liberty that was included in the operating agreement. It was how the ownership of Sony/ATV was structured right in 1995. That was money that came off the top when it came to determining what Sony ATV members got. But for some reason, although Michael Jackson was indeed 50% member and a director of the board, did not have the correct distribution or sometimes received the crumbles left.

If the catalog were sold, possibly the operating agreement might not exist; therefore, the catalog would have a higher value because fewer expenses were laden into that catalog. That’s why Michael Jackson wanted to sell to a third party. Selling 100 percent of the catalog might have been more valuable because it would have taken out that “administration fee,” that Sony used to get according to the pursuant Sony ATV agreement, as understand how it operates. For example, Sony was charging to Sony/ATV double of what EMI was charging to MJ when he was the owner of 100% of ATV.

So, here is crystal clear that the media was feed by false statements, or they were in cahoots with the industry into smearing Michael Jackson’s reputation. There’s no doubt that in 2006 Jackson owned 50 percent of Sony ATV. Also, Sony Music was cheating on Michael’s royalties’ calculation of his personal intellectual property and Sony/ATV revenues.

The result of all of the above was a no-binding offer from Fortress with a high interest rate and elevated fees proposal. It also included a right of Fortress to buy half or all of Mr. Jackson’s interest in Sony/ATV in case of the loan defaulting.

These coming and forth caused due to the lack of collaboration of Sony and Fortress, resulted that on January 13, 2006, the forbearance period was extended to February 18, 2006, according to an Amended and Restated Put Extension Agreement, among Fortress, MJJ, MJPT, MJ-ATV, and Sony. And Michael Jackson’s financial situation incurred substantially more liabilities, including liabilities arising from his delay in obtaining the necessary financing.

The short-term forbearance period granted by the Fortress entities, however, did not eradicate the risk of a foreclosure on the assets of MJJ, MJPT, and MJ-ATV, which would in all likelihood put them beyond the reach of any future judgment creditor, absent a refinancing of the existing facilities.

A couple of weeks later, the Citibank proposal came across Fortress’s desk. Fortress had a small period during which they had to determine whether they wanted to match the Citigroup financing, as was their right, and in 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 as the refinancing. And that exercise caused everyone to revisit the City financing and explore the legal ramifications of going or not going with Fortress.

Contrary to Fortress, the Citigroup offer was a serious, professional, and structured financial project. And compared to the others, the most convenient one. Michael’s signature on the documents was already arranged through Mr. AI Kahn’s office. As of January 26, 2006, Citigroup was the potential lender to the trust in connection with this refinancing arrangement they have planned. 

Michael Jackson in Hamburg to visit the Shleifer family in January 2006

Citigroup proposed a bankruptcy-remote structure to refinance the Bank Of America loans to which the MJ Trusts’ assets 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 loan proceeds would then be distributed to repay the MJ Trusts’ existing indebtedness under the BOA loans.

Citigroup imposed on Sony and its affiliates that the guaranteed advances had to be paid and that third-party offers were acceptable in the event of a sale procedure. The project also had taken out the negative covenant – 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 default attributable to any net or omission of SME, Sony/ATV or Sony guarantor, (any such approval in a clause or above not to be unreasonably withheld or delayed). 

It must be clear that Fortress is not a bank but a 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.  Fortress was “placing a bet” on Jackson’s debts; they were specialized in distressed debt, typically associated with overleveraged entities or those at risk of impending bankruptcy.’ The firm and others like it “are designed for wealthy investors looking for big returns on riskier bets.”

Distressed debts are risky investments, but they have considerable profit potential, either in the event of the entity’s turnaround or because, in a lending-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’s death – an analyst questioned Bank Of America’s “wisdom” — not for lending to him but for removing the loan from its books. Because the point was that Michael Jackson’s assets were NOT overleveraged entities either at risk of impending bankruptcy. But someone or something was actively working behind the scenes to bring his assets in those conditions.

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 were assessed: the unique risk in this transaction was the chance of not getting paid back due to an event of default.
• Risk covering: having determined that the collaterals over-covered the loan value, from the return side, it was balancing the probability of getting repaid in full or getting repaid with or without default and whether or not the interest rate and points you were getting compensated.

Comparing Fortress’s request to one month LIBOR plus 3.50 % spread and Citigroup at one month LIBOR plus 1.50 % spread, it’s evident that the return was not interesting enough for a loan sharks entity like Fortress. I’m sure there are other reasons for the acceptance of a conventional and marketable refinancing structure as per Citigroup’s offer.

On February 14, Fortress informed Jackson by fax that they wanted to exercise their first right offer, matching Citibank’s offer. Originally the closing refinancing was on March 2; however, due to complex open issues, including of the creditors’ identifications, as well as establishing the clearance of all the titles in Michael Jackson assets being used as security, the date was postponed.

• What were the reasons that moved Fortress to comply with a substantially conventional and structured transaction?

They answered not to want this lucrative and over-collateralized deal to sneak from them, but – having read the depositions available of the plaintiffs and the defendant, Sony’s efforts and suggestions in the whole negotiation is self-evident.

Meanwhile, Media ran around Europe in search of “signs” of MJ in Italy and then in the UK.