MAY 2001








In his annual article for the Cannes Film Festival,
Greg Bernstein analyzes the state of film financing

Greg S. Bernstein

So, has the past year provided any new avenues for financing of indie films?

Not exactly.

The past year saw even further retrenchment in the financing for indie films. Supply, still high relative to 1997 and earlier, started to fall due to the lack of financing, but it has not fallen fast enough, and at the same time the demand has been falling resulting in yet more of an oversupply.

As prices and demand for films continued to fall, banks continued to restrict the amount of gap they would provide. The German buyers, most recently the single best source of financing, not only in terms of territorial sales, but equity investment, retreated, having gone the way of the dot coms, lacking cash for expansion and stock prices that will not attract new investment.

Nevertheless, some bright spots in the indie film financing world exist or are starting to emerge. While most of the world may be viewing and exploiting American films, there is no question that without the international financial support of American films, they would, at least on the Indie side, become very rare.

Here is an analysis of the current financing schemes for Indie films:

1. Gap Financing - Currently, gap financing is covering between 20% and 25% of the budget. That does not necessarily mean you have to have presales for the 75 - 80% balance. Generally, a mix of presales, equity and subsidies tends to be the rule. But whether you can get any gap financing is dependent on many other factors, like what territories have been sold, whether there is a US deal in place, etc. Moreover, those banks that are providing gap financing are shrinking by the minute. The reason is not necessarily a fear of gap financing, but in order to gap finance today you have to be willing to also finance the presales and tax shelter benefits that are providing some of the financing. That limits the potential financiers to a handful of US and European banks familiar with these complex arrangements and relationships.


2. German Pre-sales - German presales have always been the cornerstone of almost every indie film financing. However, at the recent AFM, not only were the German's not investing equity in films, they were also not prebuying films nor buying finished films. Without German presales, which was running in the 10-20% of the budget range, typical bank financed film financing, gap or otherwise, will likely be very limited. The reason for the abrupt halt in buying has focused on several factors including low cash positions by many German companies, over purchasing or over extension on prior buying sprees, and a tightness in the German television market (both a consolidation in the possible TV buyers and a change in viewing habits). Most whispers in the halls of AFM indicated the halt in buying from this key territory was temporary (or maybe this was just wishful thinking) and that buying would be back, albeit not quite as strong as before, at Cannes. Well, we shall see.

3. German Equity Investment - This actually came via two different sources: Neuer market companies flush with cash and tax driven production funds.

The Neuer market companies, for the most part, have used up their IPO cash reserves. Given that most of these companies now trade at less than 90% of their initial offering price, they will not be able to return to the stock market for additional funding. They must now turn their film and other purchases into operating income to survive. The scenario of raising capital, spending it quickly and maybe not so wisely, and then coming to realization that to survive one must operate like a business, is almost precisely the story of the dot.coms. Nevertheless, there are still a few companies that have spent their fortunes wisely or thriftily and still have reserves to invest.

More important, and still a strong source of equity participation are the German film funds. Most, but not all, raised, and continue to raise, funds based on German tax advantages offered to German citizens. While there have been some recent changes in German tax laws that may reduce the number and amount of these funds, there still exists, and should be more towards years end, of these funds. While the first of these funds was almost like finding free money, which is typically the case with most tax based investments, these funds have matured, not to mention realized that they are THE financing game today, and now seek real economic participation and returns on their film investments.

4. Spanish Investment - All eyes are on Spain to see if the contemplated IPO's of this country's media will yield the kinds of funding the German Neuer market brought to film in 1999/2000. Hopefully the spiral will not follow as well. Currently, Spanish buying for film is up. Spain has been on a buying binge, both in terms of higher demand and higher prices. Given the demand for product in Spain and the strong economy, if media companies do in fact go public and raise significant funds, its very likely that increased Spanish buying as well as Spanish equity investment in films will occur.

5. Netherlands Tax Credits - While there has been lots of talk about taking advantage of these benefits to finance films, and the likelihood of this jurisdiction being the next hot bed of activity, setting up funds like those in Germany or direct benefits like those in Canada, not much has happened so far. I have only seen a handful of the deals happen, and then only on truly Netherlands produced films (i.e. non-American). This is definitely a country and benefit to watch in 2001, but it may not be the holy grail everyone thinks it will become.

6. Insurance Backed Financing - Currently, all that is being financed by insurance companies is the litigation costs for their lawyers. Many insurance companies are suing or being sued on the policies they issued during the 1997-1999 hey day of this film financing tool. That is not to say that all insurance companies failed to pay, many did pay, but a number are being sued for not paying on the policies that they issued or are themselves suing to get out of any commitments that exist for them to finance more films. For those that were not familiar with this form of financing, in brief, a bank or other financier would lend or make an investment in a film. The insurance would guarantee to the financier that if, by the due date, which was generally 24-36 months, the financier had not recouped their entire investment, the insurance would pay any loss. Since most of these policies were issued in 1997 to mid 1999, most of the payment dates came up in 2000 or will in 2001. Since the losses on these transactions that the insurance companies are being called upon to pay have, almost universally, been far greater than the insurance companies thought they would find themselves having to pay, there has been and will be much litigation in this area.

Still, there have been rumors of some insurance companies, or rather different ones, considering issuing similar pecuniary loss guarantee policies. Obviously, they are learning from the mistakes of those that came before them and, they hope they are creating better economic models and policy terms. However, even if these policies become available, given the number that have recently defaulted or are litigating their liability (all companies with top notch credit), it is doubtful that any institutional lender will be willing to take the risk on accepting these policies as collateral.

7. UK Sale Leaseback - While some of the rules have been tightened and it can be somewhat costly to bank the benefits, UK benefits to a production can provide, net, between 6% and 10% of a film's budget. Generally, because of the costs of the transaction, only larger budget ($10 million or more) can benefit. There is no question that a production that is being filmed in Europe (treaties in other countries may make these benefits available too) should consider availing itself of these benefits. When the benefits from this country and other territorial incentives (Luxembourg, Eurimage, Canada, Germany, Isle of Man) are combined, it is not uncommon to cobble together 25-35% of a film's budget. But before you run off to try and do this, keep in mind that the film must meet certain production qualifications in order to receive these benefits.

8. Canadian Benefits - For American producers, this continues to be the simplest and easiest to access to finance part of a film's budget. The amount of financing available varies depending upon whether the film is simply taking advantage of labor (services) credits (11% federal plus provincial credits), exchange rates and lower costs of production or trying to avail itself of the greater benefits (and burdens) of subsidies, like Telefilm Canada or the federal production credit). If you are looking for financing to cover part of your budget without traveling to the ends of the earth or having to make sure your story, cast, director or writer meets some national mandate, then Canada is it. Between the federal and provincial services credits, exchange rates, lower costs and favorable union benefits (lower costs), a producer can save or effectively finance between 15% and 25% of a budget. More if you want to meet the more stringent national film rules.

9. Luxembourg Benefits - Another country that provides benefits for filming in their country, which benefits translate into partial financing for a film, is Luxembourg. Generally, because of transaction costs, its better to make larger budget films here. But the benefits can cover between 10-15% of the budget. Co-production opportunities can enhance the available financing.

10. Eastern Europe - For cheaper costs of production and, in some countries, contributions to the below the line costs of production by way of facilities deals (the government or investors in that country contribute goods and services instead of cash), many Eastern European countries are the way to go. Of course, production crews and facilities are sometimes more difficult then shooting in the U.S. or Canada, but the benefits of reducing 10-25% of the costs of production, or effectively obtaining 25% or more of the production financing through receipt of goods or services for the production, cannot be overlooked. There are a few countries where co-production treaties with European countries exist, so its possible to combine the lower cost of production benefits with some of the other European benefits.

In summary, while financing for films is unquestionably tight and difficult, using some creativity, a lot of perseverance, and a little luck, one can still access various financing for indie films. In particular, availing oneself of various co-production opportunities, together with traditional presales and gap financing, appears to be the most likely road to travel to film production on the film finance odyssey of 2001.




Reprinted with permission by The Business of Film

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