Last week we reported on the sale of Sumner Redstone’s investment in Midway.

Well for an update on the latest – Midway is in danger of defaulting on their bonds, over USD 100 million in debt.  You can guess that is a lot of money that Midway does not have in their checking account right now, so this can be a bit of a problem.   For it be a full blown problem, the bond holders must demand to be repaid and Midway needs to fall short in coming up with the cash. Sensational headlines will tell you Midway is defaulting and the sky has fallen on their heads, reality is this is a pretty common event in the capital markets and nothing to panic about yet.

Allow me to explain. When a loan or bond is issued, there is normally a change of control clause included so if management or owners of the borrower changes, then the lenders can revisit if they want to continue to lend money to the borrower.   This clause is in place for a variety of reasons to protect the lenders mainly because the decisions to extent credit go beyond pure numbers to include qualitative variables such as direction of the industry and business, experience of the management team, and more.   Lenders don’t want someone buying the company and changing the business completely.

Before the internet explodes with postings of Midway defaulting on their loans and notes, lets realize they have just triggered the change in control clause and it’s not technically in default yet, they have plenty of time to “cure” the issue at hand.

One of the reasons we haven’t seen much information from the new 87% stakeholder of Midway or from Midway themselves is because they will get together, sit down with their lenders, and talk things through.  Mainly introductions around the table and what are the plans going forward.   Similar to the grilling the first time you meet your girlfriend’s father, “And what is your intentions with my investment” is what they will say.   FYI the incorrect response is pump and dump.   My bet is Midway has spent all weekend with their bankers discussing the current situation and alternatives for the future.  Some of the options for Midway will be things like:

1. Buyback debt in the open market – Debt is traded between lenders and on occasion the borrower can negotiate a price with the holders of their debt at less than 100%. A cheap way to reduce outstanding debt if you can afford it, which Midway probably cannot.
2. Refinance 100% of the notes – all the lenders say, hell no, pay me now, I don’t trust you and Midway finds someone else to borrow money from.
3. Refinance only the note holders who are dropping out – some of the lenders say hell no and some say ok. Those who say no get repaid or refinanced.
4. Lenders are happy with new management and don’t invoke the right to trigger default and life continues on as normal. This is probably the most likely scenario unless a few lenders are very upset with how Midway has been performing recently.
5. New owner breaks up the company and sells its pieces – this option depends on how much each of the assets Midway has is worth, IP’s and tangibles, but with claims of the new stakeholder being a passive investor and not having any prior involvement with Midway, a break up scenario is unlikely.

We won’t see or hear much more until the investment bankers and Midway have a few chats and decide whats next.  So let’s wait for the announcements and not rely on the headlines.