Insurance plan to guarantee film investments – for a price

If it were possible to guarantee investors that they would get their money back, the task of raising finance for independent films would be a lot easier. Now, it seems, it can be done. Problem is, it’s expensive.

Brainchild of financial insurance bond expert Roy Bays of London broker Cork Bays & Fisher, the Film Investors Guarantee scheme promises recoupment, plus interest, of up to $3.5 million – or 50% of the budget – on U.K.-based features within two years. Maximum budget eligible for the scheme is thus $7 million, the average budget for most U.K. pictures.

At present, films based in the U.S. and elsewhere are excluded. The reason, says Bays, is that the scheme has been devised under U.K. regulations, and he is confident of settling disputes, should they arise, under English law. Exec agrees that it could eventually be extended.

Moonlight Films’ “The Bridge,” produced Lyn Goleby, has been financed in part using the scheme. Film is currently in post-production and Goleby said that, although the investment insurance guarantee was expensive, it provided her with funds that she might not have been able to raise otherwise. Palace’s “The Pope Must Die” also has used the scheme, and, according to Bays, a third is in documentation.

According to Bays, it could be two years before he is able to assess the scheme’s viability. He says the key is to balance the needs of insurers, who require a premium commensurate with the risk, and the needs of producers, for whom investment insurance has to be affordable. Standard practice in insurance biz is to wait for results and calculate rates according to the ratio of winners and losers. Current rates are therefore highly provisional.

Bays quotes fees for the service as ranging between 6%, for a low-risk project, to upwards of 10% for a project that is perceived to be less secure. One Brit producer who examined the scheme says that the cost could have reached 18% of the sum insured, which was prohibitive.

With the completion guarantee already taking up to 6% of the budget, albeit with no-claims refunds, and with banks charging arrangement fees, expenses and usually a 2% override on interest rates for discounting distribution contracts, producers have to think hard before adding further to their financing costs.

The attraction of investment insurance, however, says Bays, is that it can significantly improve the chances of securing production funds, either in equity or loans.

Producer Goleby explains that more than half the cost of “The Bridge” was covered contracted pre-sales, and these had been discounted by the bank. But she still faced a substantial funding requirement. Projected sales forecasts from remaining territories amounted to 150% of the shortfall. Goleby approached Bays, who agreed, on the strength of these forecasts, that if Goleby could find a lender to put up the missing money, he would guarantee recoupment. Goleby’s bank was happy to oblige.

Goleby notes that the deal enabled her to go into production with many territories still unsold. “The Bridge” has a first time director and a first-time writer, and Goleby believes that she will be able to secure better terms showing distribs a half-finished film than pre-selling on the names alone.

General view is that investment insurance is particularly apt for films with such high-risk elements as tyro talent.

Bays passes on the insurance risk to underwriters at Lloyds. They earn their premiums by taking the risk that the forecast pre-sales contracts are not fulfilled or that in some other way the film fails to reach its sales targets.

For the scheme to work, the producer must have firm presales covering at least 50% of the budget and forecast sales of at least 150% of the sum to be insured. Bays emphasizes that producers are required to provide documentation supporting their forecasts, which also are scrutinized by an expert.

So far, few projects have met these conditions. Bays says he has been approached by producers of 25 feature films, all but three of which have been rejected. Bays’ scheme is not the only such initiative launched by the insurance business. Completion guarantor James Swann announced a similar scheme last year and Pan-Financial, another London-based insurance broker, has guaranteed investment funds in at least one recent production, Tony Palmer’s “The Children.”

The concept of film investment insurance has never really caught on in the U.K. Bays, who has a track record of developing innovative financial insurance – his company dominates the U.K. market in travel bonds – appears to have an open mind about his scheme’s success.

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