‘The years of largesse and exuberance are over’

Nostalgia clouds the minds of many independent producers as they contemplate the current opportunities for securing debt and equity financing for their movies. This is not just nostalgia for the halcyon days of Section 42 and Section 48 tax-based financing in the UK, the so-called sale-and-leaseback’ era. Producers even look at the more recent past with fondness.

“It’s not what it was,” is a familiar refrain. In the UK in particular, the squeeze is being felt. In the wake of the global downturn, many of the banks have pulled out of the film sector. The Bank of Ireland explicitly quit the film business last year. Other once-major players such as the Allied Irish Bank and the Royal Bank of Scotland are markedly less active. What is left in their absence is a number of smaller niche players who do not have the capacity to do major deals.

“You might get 30% gap and they [the financiers] would lend you a good number against the pre-sales and they would give you a good number against the tax credit and you could go out and get a chunk of equity from private funders, and you would be done,” one observer recalls of the not-so-distant past. “Nowadays, you would be hard pressed to get 20% gap and sometimes not even that. You will get less against your pre-sales, a smaller percentage of your tax credit and the equity is very tough to track down.”

The big European funds that once pumped money into international co-productions, for example VIP Media in Germany, are a shadow of their former selves. EU state aid regulation laws have made co-productions increasingly difficult to piece together. Tax incentives are now geared towards local producers. This inevitably means budgets have contracted and there is less high-profile fare for investors.

“There are lots of people who will lend against tax credits but there are a limited number who will do gap financing.”

Ivan Mactaggart. BMS Finance

Some financiers have a credibility problem thanks to their failure to deliver what they originally promised. “In the past, a lot of equity funds had slightly dodgy reputations. Producers were never certain whether they would be able to raise the money or not,” says lawyer Abigail Payne, a partner at Harbottle & Lewis. “Fortunately, the smaller number of funds remaining on the film-financing market today, such as Prescience/Aegis, Ingenious Media, JC Trust and Quickfire Films, are very reliable and professional which makes film financing much less stressful.”

Meanwhile, financiers who were heavily involved in independent production in the sale-and-leaseback era have turned their focus towards US studio films.

Ingenious Media, the blue-chip UK company that for many years has been providing project finance to British films through sale-and-leaseback and equity investment, is riding high after backing James Cameron’s box-office hit Avatar.

“The business is mainly studio films with a handful of indies every year,” says James Clayton, chief executive, Ingenious Investments.

The company raises funds from the corporate institutional market for investment in US studio films. Ingenious continues to offer “bespoke” financing opportunities for high-net-worth individuals who want to become involved in independent films but this is a relatively small part of its overall activities.

Some independent producers are saying the financing climate is as tough now as it has ever been.

“[Financing] is available but it is harder and harder to find,” says Patrick Cassavetti, producer of Terry Gilliam’s Fear And Loathing In Las Vegas, Patrice Chéreau’s Intimacy and Amma Asante’s A Way Of Life. “If you had a $10m film and a 30% gap two or three years ago, if you had the world to sell, it wouldn’t have been a problem [to close the financing].”

Now, though, Cassavetti says producers have to be able to “put up sales figures that are 150% or 200% of what the remaining gap is”. “There are lots of people who will lend against collateral, will lend against tax credits but there are a limited number who will do gap financing,” notes Ivan Mactaggart, who heads up the film department at BMS Finance.

Financiers confirm they look to foreign pre-sales as evidence of a film’s commercial viability. The Catch 22 here is that achieving significant foreign pre-sales is now far tougher than it used to be.

Cassavetti argues that “the food chain that supplied finance to the independent sector has just withered”. TV companies no longer have the resources or will to buy film, the collapse in the DVD market and the uncertainty about the download market all exacerbate the problem. “The years of largesse and exuberance are over,” Cassavetti says.

Spotting the financial silver lining

Financiers are very choosy and there are far more films than there is money to go around. Even so, the mood is not as dark as might be imagined. Some note that - as Prescience’s Paul Brett puts it -  producers’ fretting is hardly new. “Even at the height of Section 48, producers were saying that money isn’t easy enough. That’s just the nature of the beast.” The success of titles such as Avatar underlines that audiences still have an appetite for movies.

“Paradoxically, the credit crunch doesn’t really seem to have had a negative effect at all on the amount of money available for private debt and equity funds, and Enterprise Investment Schemes [EIS] in the UK, and it’s commonly the funds [rather than the banks] which are now providing finance against pre-sales, gap and the tax credit,” says Abigail Payne.

“Theoretically, it should be easier to find risk equity because you can’t put your money in the bank,” says Cassavetti. As he points out, the global economic crisis underlined how risky other forms of investment often were. Film no longer seems such a shot in the dark.

“We feel a lot of opportunity,” agrees Stephen Margolis, founder and CEO of London-based Future Film Group. “The traditional lenders from a banking perspective are not as available for the small individual film deals.”

Instead, Margolis suggests, “where banks are operating is that they’re willing to lend money to companies such as ours for us to be able to lend on and operate in this space”. The role that banks used to take, lending against the tax credit and distribution contracts, has largely been taken over by independent financiers. Future is currently putting together apan-European Fund, Taurus Media Finance Company.

In the UK, there are still high-net-worth individuals who have the appetite for investing in film. Many financiers remain active: Prescience, Aegis, Ingenious, Quickfire Films, Matador, Goldcrest, Future Films, BMS Finance, Limelight, Footprint and Aramid and various other players in the UK still provide debt and some equity financing to producers. And distributors are increasingly willing to put equity into movies.

The credit crunch doesn’t seem to have had a negative effect on the money available for private debt and equity funds.”

Abigail Payne, partner, Harbottle & Lewis

Some North American banks and financiers remain active in Europe. Sam Taylor-Wood’s Nowhere Boy was backed by Ontario-based private lender Aver Media. Banks including Coutts and Barclays are still prepared to lend against the UK tax credit.

Ian Hutchinson, formerly director of film finance at the Bank of Ireland, has set up a European film fund provisionally called JC Trust as well as a separate fund called Silver Reel (which will fund up to 20% of a project’s budget against the expected value of unsold territories).

Prescience’s Aegis Fund is also increasingly active. The fund, which has backed St Trinian’s 2: The Legend Of Fritton’s Gold and Burke And Hare, lends against the UK tax credit and pre-sales while also offering gap financing. Combined with the Prescience structure it can cover up to 60% of a film’s budget.

Sole trader schemes remain in existence, albeit with the looming risk HM Revenue and Customs (HMRC) may call foul on them. EIS funds have become increasingly important for financing films in the UK. The downside is that EIS companies are capped at $3.1m (£2m) per individual fund. Under rules introduced by HMRC in last December’s pre-budget report, it is no longer possible for several different EIS companies (each capped at $3.1m) to contribute to the same film via a partnership or LLP. This practice, referred to by some as “daisychaining,” was used for some very big-budget films as well as for mid-range British movies.

However, the clampdown is not retrospective. Companies that raised funds before December will still be able to invest. Goldcrest, for example, is going to back three to five independent productions in the $4.6m (£3m) to $12.2m (£8m) budget range this year through its EIS scheme Goldcrest Film Production LLP.

“It’s possible to make higher return multiples on independent films than on studio movies.”

Adam Kulick, partner, Goldcrest Capital

A few years ago, an EIS Fund capped at $3.1m seemed like small beer. Now, with budgets contracting, it is a decent sum. “Your average budget now is probably £2m [$3.1m] to £2.5m [$3.8m] whereas two years ago, it was closer to £5m [$7.6m] to £8m [$12.2],” notes Abigail Payne. “As a result, the £2m [$3.1m] raised by EIS will get you a lot further than it used to.”

Spain looks increasingly attractive for international co-producers thanks to the greenlighting of the territory’s new national film fund, worth $800m over the next five years. US investors, for example Regal Entertainment, are eager to enter the Spanish production and distribution market.

For investors, the film industry retains an attractive pull in spite of the turbulence. “It’s possible to make higher return multiples on independent films than on studio movies,” notes Goldcrest Capital partner Adam Kulick. “Investors remain interested in well-structured deals that provide potential upside and also in the creative energy and excitement of the industry… the returns are not correlated to other markets and it’s more diverting for many investors than buying another stock or bond.”

Meanwhile, as Margolis puts it, “financiers typically put on a brave face”.

What many feel now is that if they can generate returns for their investors in today’s tough fiscal climate, they will be very well placed when the wheel turns.