While it’s clear The Hobbit will be a huge money-maker for MGM, it hasn’t been clear that MGM would actually be able to fund the film before the studio runs out of cash. Now, however, it looks as though the funds will be available for at least the next year (filming is expected to begin sometime next year).
Simply put, the interest on MGM’s (substantial) debt was defered for the next 3 months so that MGM could keep the studio up and running. Here’s an excerpt from a full article that goes into all the gory fiscal details:
MGM has secured support from key lenders to give the studio enough cash to proceed with its participation in “The Hobbit.”
A recent proposal by MGM’s new CEO Steve Cooper to defer interest payments on its debt load for the next three months on Thursday won a crucial endorsement from J.P. Morgan.
The investment firm leads a lenders steering committee that has been agitating for a dramatic restructuring of the Lion’s operations and its ownership structure. In exchange for an agreement to limited interest forbearance, J.P. Morgan secured a few changes in existing debt terms.
Concern over MGM’s hold on “Hobbit” is at the heart of the activity. In a 50-50 rights partnership with Warner Bros.’ New Line unit, two “Hobbit” pictures are being developed.
The first “Hobbit” aims for theatrical release in 2011, with Guillermo del Toro on board to direct that, and a sequel. “Lord of the Rings” trio Peter Jackson, Fran Walsh, Philippa Boyens and del Toro are writing scripts for both and are expected to deliver the first screenplay by the end of November.
Warners will lead production and distribute at least domestically. For now, the Burbank studio also is covering any immediate expenses.
In the end, the forbearance was granted, but not everyone was thrilled with the move. But a 51% majority would have had to oppose the plan to block its implementation, and that was never likely given such a disparate group of lenders.