After the storm

Putting together the financial jigsaw puzzle necessary to make a significantly budgeted independent US film has never been easy. And over the past two years, finding and assembling the pieces of the puzzle has become harder than ever, thanks to a confluence of events in the film and financial worlds.

In the financial sphere, the global credit crisis has led many of the Wall Street players who had been ploughing money into Hollywood to retrench.

In the film arena, the DVD slump, soft foreign sales market and US theatrical distribution shakeout have conspired to undermine the traditional independent financing model.

Bullish US producers and financiers suggest the film economy, like the broader economy, may now be emerging from its recession. It is clear, though, that the central pieces of the indie financing jigsaw have been severely affected by the turmoil.

“There are probably more scripts coming out way than when there was too much capital in the marketplace.”

James Stern, Endgame Entertainment

Equity has recently been the most important piece of the puzzle, typically accounting for a much larger portion of a film’s budget - up to 50% compared with perhaps 20% a few years ago - to make up for a smaller number of international pre-sales. But even before the financial crisis hit 18 months ago, the money that Wall Street hedge funds and private-equity funds were investing in studio slates and some larger independent companies had become scarce. Now, according to financial players, those funds are simply looking elsewhere.

“There’s a feeling that there are better returns to hunt for under better risk profiles in other asset classes,” says David Molner, managing director of media finance specialist Screen Capital International. “So I doubt there will be a surge in appetite from big institutions until there’s a sustained easing of credit.”

Recession opportunities

Finance and production companies with their own capital - courtesy of a rich owner or Wall Street backers - have faced serious challenges during the recession. While a few have thrived, some, such as Sidney Kimmel Entertainment and the beleaguered Yari Film Group, have scaled back their operations considerably and others, such as The Film Department, are looking for new backing.

For the self-financed companies which have thrived, the recession has created some new opportunities. “There are probably more scripts coming our way than there were when there was too much capital in the marketplace,” says Endgame Entertainment chief executive James Stern.

Endgame is considering a return to debt financing after becoming wary of deals that were poorly structured during the capital boom. “Now there are fewer people doing [debt] and we’re increasingly interested,” Stern says.

“There are a number of high net-worth individuals amd foreign investment funds looking for opportunities.”

Michael London, Groundswell Productions

Equity from wealthy individuals - either ‘wildcatters’ taking a gamble on film or investors willing to risk capital for the experience of movie-making - is still available, producers say, and may even grow as the glut of independent movies produced over the last few years is used up.

“There’s much less production in the distribution pipeline and that has created a sense that there are better investment opportunities,” says producer Michael London, who recently led a management buyout of his Groundswell Productions from hedge fund TPG-Axon. “I don’t think anyone is seeing much institutional money flowing back in,” he adds, “but there are a number of high-net-worth individuals and foreign investment funds looking for opportunities.

“They’re just much more disciplined than before, and the projects that producers bring to them have to have a financial model that really makes sense.”

Loan hunting

Finding the debt piece of the finance puzzle should, in theory, be easier than finding the equity piece. But in today’s economic climate that may not always be the case.

Most of the European banks that were once active in US film lending have now withdrawn from the field. And the US banks that remain active are being more conservative, at least according to producers.

“Banks are looking for more collateral than they used to,” reports producer Ross Dinerstein, managing partner of Parlay Media. “Only a few sales agents are approved and when [banks] are evaluating foreign sales estimates, the discount is significantly higher than in previous years.”

Bankers say that if it is more difficult to get a loan, it is because market conditions have become tighter, not their lending criteria.

“We haven’t changed our credit policy,” insists Jared Underwood, senior vice-president of leading film lender Comerica Bank. “What’s happened, however, is that qualifying for our credit policy has become harder because the outside world’s harder. It’s harder to pre-sell movies.” Even harder for producers is finding gap or super-gap debt financing to bridge the gulf between pre-sales/equity and production costs.

Although some say they are still willing to lend against 20% gaps, banks appear to be more cautious about gap lending and are said to have hiked prices for the service.

And the ranks of non-bank gap lenders have thinned considerably. The specialists that remain have become more cautious as conditions in the international market have worsened. As a result they are doing far fewer deals than they were a few years ago.

“It’s just much more risky than it ever was. And it was always risky,” says Diane Stidham, managing director of super-gap lender Newbridge Film Capital, which is backed by the Rizvi Traverse equity fund. “We’re so much more careful. We’ll call buyers’ reps when a project is brought to us and say, ‘Does this sound even remotely interesting to you?’ We want to make sure there’s a real commercial viability to the project.”

“The model still works, movies still get made; but thier cost must come down commensurately.”

Bill Block, founder, QED International

The question is how the indie financing jigsaw will work in a post-recession world in which producers will have to live with less lucrative DVD, North American theatrical and international sales markets.

“We’re all dealing with a smaller revenue pie,” says Bill Block, founder of QED International, whose best picture Oscar nominee District 9was one of a number of independently financed success stories released last year. “The model still works, movies still get made; but their cost must come down commensurately.”

Soft money could become an increasingly important piece of the puzzle. With banks now willing to lend against some ‹ though not all - tax rebates and credits offered by international locations and by dozens of US states, those incentives already help producers fill a hole in the traditional financing model.

There are concerns the US incentive scene could be headed for a shakeout but, argues David Molner, that may not be a bad thing. “It will make life easier for independents,” he suggests. “They’re going to go to fewer states and it’s going to make the decision less complex.”

Tapping p&a funds

Specialised prints and advertising funds could be a new part of the picture. By making it easier for them to either self-distribute their films or secure domestic distribution deals, p&a funding could help producers borrow more against domestic rights. Financiers including Endgame Entertainment and Clear Scope Partners (the new Rizvi Traverse-backed financial advice company) are thought to be working on assembling p&a funds.

The Middle East, India and Asia might be sources of fresh equity investment for larger independents. While investors from those regions have so far favoured the Hollywood studios, a few independents have tapped into this source and so cushioned themselves from the vagaries of the international pre-sales market.

“If we can prove there is money to be made in Hollywood it will be good for everyone.”

Jeanette Buerling, co-owner, Magnet Media Group

What it takes, according to Ashok Amritraj, whose Hyde Park Entertainment has a seven-year, $250m deal with Imagenation Abu Dhabi, is “a combination of track record, a good business plan and a knowledge of the areas you’re dealing with. Asia and the Middle East are very specific regions, and since I come from India I understand them very well.” Of course, any new money flowing into the independent sector will ultimately have to produce benefits not just for the independent producers on the receiving end but also for the backers writing the cheques.

Magnet Media Group, one of the few new equity financiers to have set up shop in Hollywood since the global recession began, is using money from wealthy individuals in the UK, Switzerland and Germany to back independent US projects such as Overnight Films’ 13 and The Experiment from Inferno Entertainment and Natural Selection.

Magnet co-owner Jeanette Buerling says her company is “pretty stringent and very aggressive in covering the risk for our equity. We need to be able to show our investors that equity actually does make money in Hollywood.” Doing that could also encourage other financiers to invest in independent film, giving producers more ways to piece together their financial jigsaws.

“If we can prove there is money to be made in Hollywood,” Buerling says, “it will be good for everyone.”