MGM-Pathe Communications Co., in a surprise announcement, said Wednesday that it will be a month late in paying interest on some $400 million in bonds because it lacks funds.
The film and television studio said it couldn’t make the Dec. 15 interest payment, estimated at about $25 million, because of “employee termination costs and higher than anticipated . . . payables” in its MGM/UA unit.
But MGM-Pathe--formed only six weeks ago when Pathe Communications Corp. bought MGM/UA Communications Co. for $1.3 billion--said it expects to make the payment on Jan. 11, before it would be in default on the bonds.
In a peculiar note, MGM-Pathe also said it has been repurchasing the bonds on the open market even though it doesn’t have cash for the interest payment. Asked how Pathe could afford the purchases, a spokeswoman said: “I don’t have any information on that.”
One big bondholder said he was approached less than two weeks ago by MGM-Pathe Chairman Giancarlo Parretti, who was seeking to repurchase bonds, which were trading at a steep discount even before Wednesday’s announcement sent the price lower. Parretti said he had $75 million available to buy bonds back, the bondholder said.
MGM/UA’s 12.625% bonds maturing in 1993 closed Wednesday at $535, down $60, while its 13% bonds maturing in 1996 closed at $400, down $58.75, in New York Stock Exchange trading. MGM-Pathe stock closed at $3.125, unchanged.
Moody’s Investors Service, meanwhile, downgraded the bonds from B2 to Caa, indicating that they are of “speculative” quality.
The Pathe spokeswoman said the unexpected payables cropped up because MGM/UA in the months before the acquisition had “let accumulate two to three times the normal” number of monthly bills. “The company wants to get vendors paid as quickly as possible,” she said, adding that she didn’t know the precise nature of the bills or how much is owed.
Before Pathe closed its acquisition of MGM/UA on Nov. 1, MGM/UA executives repeatedly assured investors that Pathe would have no problem meeting its payments. Houlihan, Lokey, Howard & Zukin, a Century City appraisal firm, had also issued a solvency opinion declaring that the combined companies would be able to service the bonds.
“How do you provide a solvency opinion and then 30 days later there’s a problem?” said Dan McGlinchey, a Philadelphia investor who owns some of the bonds.
Roy Salter, a Houlihan Lokey partner, said: “We take what we do extremely seriously. The level of diligence that was taken (in rendering the opinion) was extreme.” Salter said he didn’t know why MGM-Pathe was unable to make the payment on time.
Initial buyers of the bonds, which were sold by now-defunct Drexel Burnham Lambert Inc. in 1986, included Columbia Savings & Loan, First Executive Corp., American Financial Corp. and Integrated Resources. The Resolution Trust Corp., a U.S. government agency that disposes of assets held by failed thrifts, owns MGM/UA bonds with a face value of about $7.4 million.