The global film business is being revolutionised as billions of dollars of bank finance pours into the sector. Richard Brass explores why institutions are more willing to embrace risk, and asks banking luminaries whether they are taking on too much
The dramatic developments in film financing over the last few years have looked a bit like a gold rush. Many of the headlines have created the impression of a speculative frenzy among deal-hungry private-equity firms and hedge funds, possibly not too familiar with the intricacies of the film business but bursting with cash for which they are glad to find a home.
But alongside the panhandling prospectors of private equity, another set of players with a less speculative reputation has become increasingly involved and prominent in the surge of financing - players who either should be old enough to know better or whose involvement is finally marking out film as a serious focus of investment for proper, grown-up lenders.
The growing importance of the banks as participants in the wave of slate-financing deals appears to mark a key change in the banking community's attitude towards an industry that has often been regarded as too risky for big-money involvement.
Banks have long been involved in film financing on a smaller scale, but now they are also taking major chunks of the big deals involving hundreds of millions of dollars, which have revolutionised film funding in a remarkably short time. They are arranging deals and picking up slices of the debt all the way down the chain, and an activity that was formerly the preserve of a few specialists is attracting more and more institutions.
The list of big deals in which banks have been heavily involved in the last few months alone is impressive: $1bn each for Legendary Pictures and Summit Entertainment; $500m for Continental Entertainment Group; $350m for New Line Cinema; $240m for Dark Castle Productions; $200m each for Lionsgate and Groundswell Productions. And plenty more where they came from, all of them with large portions of the finance provided by banks.
Within the last 20 months, more than $11bn has been raised for the film industry through slate financing, and the widely accepted forecast is that another $15bn will be raised within the next year, with around $10bn of it coming from banks.
Impressive as the numbers and the deals may be, they also raise questions. For a start, does this heavy exposure to an industry long regarded as only for the specialist or the obsessed indicate that banks are overlooking their fundamental concerns about risk' Laying a big bet on the chance of 10 Hollywood films producing a profit may be fine for thrill-seekers in private equity, but is that the kind of thing sober bankers should do'
Of course it is, says Heather Mansfield, founder of Mansfield Associates, which provides risk analysis and management for institutions investing in film. 'Ultimately, film is just like any other business,' she says.
'It depends on the quality of the people you go into partnership with, it depends on the quality of the film, it depends on the quality of the exploitation mechanism, it depends on the way that the deal is structured.
'If you structure these things properly and go into business with the right people, it's frankly no more chancy than any other class of asset that an investment bank might get involved with.
'And when it's a huge deal, like hundreds of millions of dollars, they don't take the risk alone. They lay it off, they syndicate it, they sell the loan around to companion banks around the world, and by the time they've laid off and laid off, their exposure is really not that much. And they're taking huge fees at every level.'
Rather than increasing risk, slate-financing deals have become an appealing investment for the precise reason that they substantially reduce the risk traditionally associated with financing individual films, according to Laura Fazio, who moved to Deutsche Bank last week after nine years as managing director and North America group head for corporate finance and origination's media industry practice at Dresdner Kleinwort. 'People have looked at film as a high-risk business historically,' she says. 'And it is, if you're investing in one film and it's a one-shot deal. We mitigate that risk using our portfolio structure.'
Others are less convinced that taking on more films necessarily means less risk. Adrian Ward, vice-president of the entertainment, sports and media group at Israel Discount Bank says experience shows that backing one profitable film is enough of a challenge without making assumptions about others.
'It's hard enough to find an individual picture that will stand on its own two legs,' he says. 'If someone then says, 'We don't just want one of these, we want five or 10 of them,' you're going to find a number of those films are not going to stand up.
'A lot of money's going into movies that individually would never have been made,' adds Ward. And that, he believes, will ultimately result in little return for the investors, or none at all.
But even if slate financing does reduce the level of risk faced by banks, bigger concerns are being raised across the film financing industry about whether the current level of investment is sustainable.
That kind of concern is not limited to film. The surge of private equity and hedge fund investment in all sectors over recent years has prompted anxious mutterings in markets worldwide that it is a great big bubble - and we know what happens to bubbles. If those whisperings turn out to be well founded, there is no reason why film should be any more immune to the inevitable result than media, airlines, retail, energy or any of the other sectors that have seen private-equity buyers snapping up assets and driving up prices over the last couple of years.
In the film industry, the trigger to any possible shake-out could well be if one of the high-profile deals goes wrong, with the investors losing out badly, a scenario that many in the finance industry are predicting.
'It's inevitable,' says Mike Wellden, senior manager, structured finance, at the UK's Alliance & Leicester. 'We think there'll be a bubble and we can't understand how some of these hedge funds and private equity funds are going to get their returns. I think there have been some work-out situations in the last six months, not known widely to the public.
'But there's always been something that's become the principal financing tool, and there's been a fallout from it, and people have to pick themselves up and start again. The banks will still be there, but they just have to be very conservative and make sure everything's robust from their point of view.'
The view that a shake-out is necessary to create a more sustainable situation is widespread. 'There are murmurs that a lot of this junior capital is going to get burned big-time,' says Anthony Beaudoin, senior vice-president and manager of film finance at the Bank of Ireland.
'To an extent, my hope is that there will be an adjustment in the market, and things will balance out, and there'll be the right amount of junior capital and the right banks in the business, and the slates will pull back a little bit.
'The biggest problem is oversupply. I mean, how many films can the studios actually release in a year' The more slate deals you do, that means more films, and more release slots that are being filled up. At what point does that reach its maximum capacity' Some people think that's in the next year, maybe two. Some people think it's even sooner, but we'll have to wait and see.
'If we ride this out, it's the banks, or at least the core entertainment banks, that will survive. Film loans will come back, these slates will be working for the most part, if you've done the right ones, and the banks will be fine.'
Laura Fazio says rumours of an impending collapse in the market are exaggerated. 'This is an emerging market, and with any emerging market through time structural weaknesses will become apparent. So the structure evolves.
'There are some deals where people said, 'Oh man, they lost a ton of money,' but I can tell you in some of the deals where people think they lost their investment, they didn't. They restructured it, they retranched it. We're talking about a series of cash flows that can be retranched and rebundled and sold off to mitigate the risk.
'There's cash in these movies and there's value in the libraries. We all have to be mindful and we have to look at the box office, but from my perspective the pie keeps getting bigger. If there's a good movie out, is somebody not going to go and see it' I don't think that happens. It makes the marketplace more competitive, but there's also increasing numbers of distribution venues that help offset those costs.
'A movie may not do fabulously in the US, but it can still do great internationally. And the international marketplace keeps growing. Then you've got video-on-demand and you've got cellphones.'
The rise of the slate
Conversely, while banks' involvement in huge slate-financing deals has been growing, their activity in more traditional hunting grounds in the film industry has reduced. Banks' involvement in single-picture financing and project financing has declined sharply, particularly in the last 12 months.
'Banks are being, as it were, brushed aside in the stampede to get at equity funding,' says Heather Mansfield. 'In terms of project financing in 2007, there is no conceivable doubt that banks' involvement has fallen.
'That doesn't say anything about their appetite. It says two things - first, that the amount of independent feature available for that sort of financing has declined; and second, that the few equity funds which are operating are being extremely aggressive, so that's where the producers tend to be going for their money at the moment.
'So these guys are doing a little bit of nail-painting, because that tide at the moment is not running their way. But most of them are waiting for the hysteria to subside, because they're convinced it will come back in their direction, possibly in the near future.'
That side of the industry is, Mansfield says, a safer place for banks if things turn sticky. 'If one of those big, big deals goes wrong, a bank's losses are going to be significantly more than if a bank does 15 small deals over a 12-18-month period and most of them come good.
'And they are still hugely profitable for the banks, because they're able to provide all the ancillary services like production accounts, like cash-flowing the tax benefits, like discounting pre-sale contracts.'
Single-picture specialist Adrian Ward of Israel Discount Bank, on the other hand, says the slate-financing revolution has been good news for institutions like his, because producers with just one film to finance are being ignored by the larger investors and lenders in their rush for slates.
'There's only a handful of banks now that are willing to do the smaller deals,' says Ward, who is based in Los Angeles. 'And there's no shortage of projects. It's just a question of having a good producer, a good sales agent, and the numbers working.'
And that's about as far from a multi-billion-dollar gold rush as a bank can get.