For the past few months, all we've heard out of MGM was development news related to its Fame movie, The Three Stooges and The Matarese Circle. It seemed like the Lion was getting ready to roar back as an independent producer next year.

But that might not be soon enough for the studio's debt holders. Although MGM generates roughly $1 billion in annual revenue, its free cash flow is only believed to be $500 million a year, which isn't enough to repay its $3.5 billion in debt, due next April.

So, the studio's owners (a Sony-led private equity consortium including Providence Equity Partners, TPG and Comcast) have formed a creditors committee and hired investment bank Houlihan Lokey to explore restructuring options. MGM's been pursuing the same for months through its own financial advisor, Moelis & Co.

For years, the studio's been generating revenue from its extensive library, but as DVD sales have dwindled that source of income has been running low. The studio also has a number of high-profile movies in the works, but they keep getting pushed back and, with the exception of this fall's Fame, won't be released until next year.

In fact, The Hollywood Reporter suggests the situation may be so dire that the studio might not survive to put out those titles:

Cash-flow concerns have sparked talk of auditors' potentially issuing a "going concern" warning by the end of June. Process insiders said those working on restructuring options are on high alert that business as usual is over for the Century City-based studio. But concocting a palatable solution for MGM -- whose operations have swelled in recent years to an estimated $150 million in corporate overhead -- may or may not prove doable, even for the smartest of consultants.

However, THR adds, "a well-placed source stressed that the issuance of a going-concern warning is a theoretical possibility but is considered unlikely. Short-term debt payments are relatively nominal, and MGM's revolving credit facility through JPMorgan Chase won't expire until next April."

Options being pursued include attracting new capital, selling studio equity, reducing operations and even, as a last resort, liquidating the company. But these are tough times to be seeking movie money and although MGM has been on the hunt for new capital for months, it hasn't found any yet.

I've collected several knowledgeable accounts of what happened during yesterday's multi-hour contentious MGM conference call with bondholders who were "very loud and very upset". Here's why:

The call was for the benefit of the lenders, and MGM management made the presentation along with Stephen F Cooper, that Zolfo Cooper restructure specialist. MGM made a desperate plea for money because the studio had missed its numbers and was going to be out of funds very soon. "The implication was that it's teetering on bankruptcy," one source told me. MGM said it needed $20M in short-term cash flow to cover overhead, and an additional $150 million to get through the end of year and continue funding its projects, and to start Peter Jackson's Hobbit.

Some say the call lasted 6 1/2 hours. Others said it lasted 2 1/2 hours with lenders, and then the lenders themselves had a conference call that lasted another 2 hours. After the MGM presentation, several bondholders spoke, "and they were irate", an insider tells me. True, this regularly happens on bad news calls like this. But in this case the creditors who hold MGM's term loan debt blame Harry Sloan for MGM overpromising and then missing its numbers, which was discussed during the summer and why he was removed as CEO. "They're not happy that Sloan let the company go in this direction but they understand what’s going on. It’s unfortunate, but they get it that the company is in a distressed situation, and they have to figure out an action plan moving forward," a source explains to me.

The conference call was planned to present the creditors with a request, or forebearance, to waive interest payments on MGM's $3.5 billion killer debt until February 2010. Because if MGM doesn’t have to make those interest payments, then the studio can afford to use that money instead to fund the production slate. The bondholders couldn’t understand why the equity holders wouldn’t fork over the dough. But the equity holders aren’t interested in writing a check because they understand that their equity is way under water already, and there's no upside for them. So, in essence, the equity holders have already written off their investment in MGM. But the bondholders have that $3.7 billion of nominal debt currently trading in the secondary market at about $.55–$.57 cents on the dollar. It's been trading in this low $.50s range for a while, so the marketplace is saying that the company is not worth more than $.56 times $3.7 billion. (And that's probably high.)

As a result, the bondholders are not in a great situation and therefore not feeling generous. On the other hand, if MGM were sold off today, most investment bankers don’t think it would fetch more than $1.5 billion to $1.75 billion at auction. This would mean that bondholders would recover less than $.50 on the dollar. This would be an even worse outcome.

So the bondhholders said to MGM, in essence, that they were going to let the studio go bankrupt and collect their money since they'd be first in line to get paid. But Cooper explained that this would be the worst possible outcome for the creditors and the company. Because if MGM were forced into bankruptcy, then it would lose James Bond and the studio doesn't think it can stay alive without 007. Also, a lot of other issues would surface that would tremendously hurt MGM.

Also, if MGM goes through bankruptcy, that's a very expensive prospect (where only the lawyers get rich), and extremely disruptive (since who would do business with MGM in the interim) and won’t get the creditors what they want which is their money back. It's more than simply MGM losing Bond. The studio could lose a lot of other franchises.

I can’t tell you whether the bondholders will agree to the forebearance or not. It requires a 51% approval vote. But some of the smart people I've contacted do think the creditors will eventually realize that a restructuring of MGM outside of the bankruptcy process is probably the best course right now.

So what's next? MGM now has to formally ask for forbearance, and the bondholders formally respond.

Turner Entertainment Co. was established on August 4, 1986 as a subsidiary of Turner Broadcasting System to oversee its film library after Ted Turner's acquisition of MGM/UA (which is now owned by a consortium led by Sony Corporation of America).

In addition to the studio, Turner got its library, which included nearly all of MGM's films up to that time, the former Associated Artists Productions catalog (the Warner Bros.' pre-1950 releases & the Fleischer/Famous Popeye cartoons)... Turner Entertainment also distributes films from RKO Radio Pictures, certain films from Castle Rock Entertainment (1994-1996) and New Line Cinema (1994-1996), and shows from TBS, The CW4Kids, TNT, Cartoon Network, Kids' WB, and PBS (1994-2004) on home video via Turner Home Entertainment, and after 1996, Warner Home Video.

Contractually, the MGM and Warner film libraries which Turner owned had been distributed by MGM/UA Home Video until their rights expired in 1999 at which point they were reassigned to Warner Home Video. This transaction also completed WB's re-acquiring of distribution rights to their pre-1950 library; it was absorbed into Warner Home Video after Time Warner bought Turner;

Casablanca was released on laserdisc in 1991, and on VHS in 1992 - both from MGM/UA Home Entertainment (distributing for Turner Entertainment), which at the time was distributed by Warner Home Video. It was first released on DVD in 1997 by MGM, containing the trailer and a making-of featurette (Warner Home Video reissued the DVD in 2000).

In 1997, MGM/UA began releasing its titles on DVD, just like every other major studio. Some of the films MGM released on DVD were from the Turner catalog, which they were still allowed to keep after Turner merged into Time Warner some time before because of their distribution deal.