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Headache, guaranteed

It seems that every year the indie producer’s lifeline gets snipped shorter and shorter.

First, the tax shelters were clipped. Then the video boom went bust. The TV and cable mania was shortcircuited. The continued flow of funds from French lending giant Credit Lyonnais finally tapped out. The Japanese investment boom was nipped because of economic woes on the homefront. And the hunt for the European coin has become even harder to track down.

Now, adding to the continued skiddishness of U.S. lenders, is the absence of the completion bond business. That business practically evaporated last year, leaving only a few to handle an enormous need.

Sound depressing?

Sorry, but the results appear grim, say industry wags.

The bottom seemed to drop out for indie producers who rely on completion bonds to get their films financed last month when Completion Bond Co., the film industry’s largest completion guarantor, closed shop (Daily Variety, June 1). The 12-year-old CBC underwrote more than 100 films a year and split the bulk of the world’s bond business with industry veteran Film Finances.

But Film Finances’ underwriting efforts are now strained because of problems plaguing its insurer Lloyd’s of London. That leaves only a handful to juggle demends: International Film Guarantors and Fireman’s Fund to name two. Even if IFG boosted its current six-pic-a-year underwriting efforts to 50 films, it still couldn’t meet the want.

Without the completion bond companies, most believe that only the major independents will survive since they will have to serve up substantial letters of credit or pledges of corporate assets against their production budgets to convince bankers their endeavors are worth the risk.

“The recession has hit and many independent producers are hurting bad,” says entertainment attorney Peter Dekom of Bloom, Dekom & Hergott. “Consider that in foreign presales, the foreign partners tend to only put down a small portion of the payment up front. The rest comes with delivery of the film and the completion bond companies helped guarantee that delivery” by helping finance the project.

“The bonding companies always picked up the slack, particularly when you consider banks aren’t really willing to take the risks without them in the picture,” notes Dekom. “Financing is going to be really difficult without them.”

But not necessarily impossible.

The hope is that either new bonding companies will enter the arena or foreign partners and investors can expect to put more cash upfront on presales.

“The current perceived panacea are companies affiliated wtih new technologies and that money in the future will come from these new technologies,” says David Colden, an entertainment lawyer with Weissman, Wolff, Bergman, Coleman and Silverman. “It remains to be seen whether (these techno shops) will become considerable investors in motion picture product. For this year, it’s highly speculative.”

Like some of the indie producers themselves, Colden expects money for film production in the immediate future to come largely from the studios who distribute their product or strategic partners overseas who pick up territorial rights through presales.

“It’s practically at the point where independents cannot be effective at raising the capital to produce pictures unless they are afforded theatrical distribution by one of the major distribution companies,” he notes.

There are several reasons why the Japanese have become even more conservative in their investment approach to Hollywood.

Not only have they watched many of their Tinseltown investments yield limited returns, their own economy has been wracked with turmoil.

Aside from the lukewarm, and at times dismal results in indie film financing, the Japanese have also seen the collapse of many investments in American real estate as well.

“Add to that the fact that they are repatriating dollars to yen and they’ve seen a substantially deflated rate in the yen from the time they made those initial investments here,” notes Colden. Coupled with that deflation are Japan’s internal problems of a diminished stock market, banks taking severe losses, a political environment rife with corruption and a “system that may no longer work after 40 years.

“So it has come a time for the Japanese to look inward in terms of investment , globally in terms of sale” since their economy is so tied to import/export trade, Colden adds.

And while the experts spend their time pontificating on the global scope of indie finance, those who live and die by it paint a somewhat brighter picture.

“It’s true that number of independent players has shrunk dramatically in the past few years and will probably continue to do so, but there is a silver lining ,” says Meyer Gottlieb, president of Samuel Goldwyn Co. “With the contraction of the independents, I think any investor interested in a pure entertaiment play today, can only find it with the independents like Samuel Goldwyn or New Line Cinema.”

Goldwyn, like New Line Cinema, is one of the few true independents left–companies that not only produce their own films but distribute them as well. Last year, Miramax was part of the mix but it has since pitched a tent on the Disney lot.

One newcomer that has grabbed a lot of attention is Savoy Pictures. While it hopes to be a dominant distributor and producer in the indie market, it has yet to produce one of its proposed 10 films. What it has done is prove itself a master at raising money.

In early February it raised $ 32 million via a public stock offering. Top talent including Anthony Hopkins, Debra Winger, Tom Berenger as well as A-list directors Garry Marshall, Mike Nichols, John Milius and Richard Attenborough have already aligned themselves with proposed Savoy projects, which include four targeted for production this year.

“When you see a newcomer like Savoy raising that amount of money, that’s a good sign that Wall Street is becoming interested again,” notes Gottlieb.

“And, you have to remember that Hollywood still provides 75% of the world’s box office and much of that product still needs to be filled by the independents ,” he adds. “There will still be European capital flowing in because they need the strategic relationship too. So I remain optimistic.”

But others involved in brokering some of the foreign investments in U.S. product say interest in making equity investments has wained a bit. They highlight France’s Canal Plus’ decision to pull back on its equity stakes in Carolco and New Regency as a prime example.

From a European point of view, “I think everyone has not only become more conservative but much more cautious,” says Bernd Eichinger, head of Germany’s Neue Constantin.

“We are probably a bit luckier than most because we finance our films through our own resources. But we do presale rights to our movies all over the world,” retaining the German territories for Neue Constantin’s own distribution outlets, Eichinger adds.

“Not only have production costs gone up, but releasing costs have skyrocketed ,” he says. “Five years ago we could release a movie for $ 700,000 to $ 800,000 in Germany. Today its three times that amount in (that) territory alone.

“But that situation is true for every territory around the world. In America you have to spend $ 10 million to open a movie and I’m not even talking about a major film,” he continues.

The second looming cost is pricier talent and overall production.

“Five years ago, if you bought a script for $ 500,000 it was considered a tremendous amount,” Eichinger says. “Then it jumped to $ 1 million and now it’s hitting as high as $ 3 million. And that’s just the script. Then you bring on a director who gets $ 6 million and a couple of stars who want $ 10-to-$ 15 million, plus they want a percentage of the gross. The money just seems to blow away in chunks. It has become enormously expensive for an independent to function in the past five years and that’s what makes survival so tough.”

Because of those soaring costs, it puts a lot of pressure on the indie to get more money from foreign partners upfront.

“For us, we don’t necessarily find it to be tougher, just narrowing down,” Eichinger says. “I guess we’re lucky. Despite all of the downsizing going on, one constant does remain:

“If you have the right product, the presell situation is very good. Distributors around the world are always looking for more product, but they want high-concept movies. And, that’s the ticket.”

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