Film finance market is still a good market to be in, despite a
tightening of credit markets
Film financing is changing. With overall business being less
dependent on tax based products, debt products have increasingly
been forming a greater proportion of the overall book. Sale and
leaseback (S&L) film business is coming to an end this year,
although it has been replaced by a tax credit available from HMRC
directly to film producers.
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Recognising that the UK business may be coming to an end, three
years ago A&L
moved into financing films more directly, which means financing
films attached to an existing library which forms an additional
collateral to those being financed.
About the same time, a new product was beginning to come to the
fore – slate financings – an arrangement for a series of films to
be financed under certain conditions without the benefit of an
existing library of unsold rights to act as additional security at
inception. These structures have been put in place primarily for
the benefit of the major studios.
It is reported that investors outside the traditional
entertainment industry have poured circa $12bn into these studio
film slates in the last three years. However, with the tightening
of credit markets, there are varying opinions on whether this
market can continue. I have always been intrigued to know how the
mezzanine and equity investors expect to get their 10–25 per cent
returns on some of these deals.
There is no doubt that the existing credit climate generally
will make film financing more difficult. But just like the other
sectors we operate in, be it PFI, infrastructure, aviation or
shipping, as long as you know who you are working with, and the
deal is structured correctly, film, TV and music need be no more
risky than any other ‘hard’ asset class.
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By GlobalDataLeading industry practitioners believe that a further $15bn will
continue to be raised in the next year, with around $10bn of this
being provided by banks. However, we have been wondering for the
last 18 months when this insatiable appetite from the private
equity houses and hedge funds is likely to run out. We think that
the existing credit tightening will at least stall investments in
the short term.
Of course, much depends on how well the films in the existing
slates perform at the world box office, as it is box office
performance that drives DVD, TV and other ancillary revenues.
Whilst the North American market place is mature, the international
market is expected to have a real growth rate of 4-5 per cent per
annum. And although DVD revenue may begin to tail off, there
are replacement channels such as the internet and phones which are
likely to grow, and at a much reduced distribution cost for the
studios.
Although A&L has not been involved, it is reported that some
existing slate transactions have already been restructured, perhaps
by extending the term of the facility, or by the studio agreeing to
produce and distribute more films in the slate.
The author is senior manager for film finance at Alliance &
Leicester
