Hedge-Funders Take a Public Bath at Paramount

Today’s Hollywood Reporter points out “rare public evidence” of a looming crisis we first told you about seven months ago: Melrose I, hedge-fund financing that helped pay for a raft of underachieving Paramount films dating back to 2004, saw its investment grade plunge six notches recently in an assessment by Moody’s Investor Service. It was bad enough at the time for the money men to threaten Brad Grey with court — and even if the lawsuit never came, the day of reckoning did.

The shift guarantees that everyone from senior debtholders at Merrill Lynch to smaller equity backers around Wall Street are locks to lose on the $231 million slate financing deal. As recently as March, the investors were rumoured to be considering suing the ‘Mount and its free-spending chief Grey after the dramatic underperformance of The Stepford Wives, Alfie and other films partially underwritten by Melrose (the funders signed on during the Sherry Lansing/Jim Dolgen regime but had no say where their money went once they were gone). Viacom CEO Phillippe Dauman himself intervened, we hear, and based on renegotiated terms for Melrose Partners’ second round of financing (and Grey’s belt-tightening), the mutiny was defused. For now.

• Paramount’s Melrose on shaky ground [THR]