Battered, but still standing

At the dais on the stage of the Dorothy Chandler Pavilion in 1987, Arnold Kopelson, with Oscar in hand, listed off a number of the usual suspects for thanks in making the best picture of the previous year, “Platoon.”

But tucked in the group of names was Richard Soames. He’s not an actor, director or studio chief. He is the head of Film Finances Ltd., a completion bonding company.

Those were heady days for completion bond companies, insurers who give banks guarantees that if a movie misses deadlines or budgets, it will take over production or repay lenders.

Without completion bond companies, some of the most important and successful movies of the day –“Driving Miss Daisy,””Rain Man,””The Last Emperor” and “RoboCop” among others — wouldn’t have been made. Business Week called Soames “one of the most powerful men in Hollywood.

But a funny thing happened on the way to financial stardom. The business virtually collapsed.

By the early ’90s, the completion bond business was in disarray. One of the industry’s biggest players, Completion Bond Co., was winding down its business, the victim of too many over-budget movies. The other industry mainstay, Soames’ Film Finances, pulled back dramatically, having been burned itself by movies that got out-of-control and anorexic margins.

Today, the completion bond business looks something like a boxer the morning after losing a big fight. It’s a little wobbly and hesitant, but ready to step back in the ring.

Film Finance, which dominated the business until Completion Bond’s creation in the ’80s, is again the leading bonder. It has new competition from Intl. FilmGuarantors and a handful of smaller, regional bonding companies. But the industry these days seems to have learned its lesson — cutting prices and taking on lousy risks just isn’t good business.

“The completion bond companies are taking a conservative approach to bonding films and taking a more serious approach than they have in the past,” says Michael H. Mendelsohn, VP of the media-entertainment finance group of Banque Paribas.

Only a few years ago, bonding companies cut wherever they could. Initially, they charged a fee of about 6% of movie’s budget. With competition, they quickly offered rebate, sometimes as much as half of the original fee if the bond was never called.

Then bonding companies switched the equation. Instead of offering a rebate, bond companies simply charged 3% and made producers fork over another 3% only if they called the bond. And quickly that 3% up-front fee was whittled down to as low as 1%.

When bonding companies couldn’t give any more on price, they gave in other areas. Producers generally had to put up their own money in a contingency fund, roughly 10% of the film’s budget, as a first line of defense against cost-overruns. Completion bonds kick in after that money is exhausted. But eager for business, bonding companies let producers set up liberal contingencies.

In addition to making dangerous concessions, the bonders also allowed themselves to get taken advantage of.

“Producers backed into numbers,” says one indie exec. “They’d say a studio will only pay ‘x,’ so that’s how much it will cost to make it.”

And bonding companies, fighting for business, would accept those budgets, even though they knew the numbers had no basis in reality.

“They knew there wasn’t enough money to make the picture, but they didn’t want the business to go across the street,” says Robert Levy, whose Tapestry Films Inc. produced “Point Break” with Patrick Swayze and Keanu Reeves, and “Killing Time,” the Kiefer Sutherland starrer. “They competed in grand fashion. It got ridiculously cheap to be honest with you.”

Even with back-stabbing as something of a sport in Hollywood, the battle between Film Finances and Completion Bond and their toppers, Soames and Bette Smith, was among the most acrimonious around. Each consistently pointed fingers at theother for destabilizing the business. And without mentioning Smith’s name, Soames still casts blame.

“We were dragged into price-cutting,” says Soames. “It was never at our volition.”

Already on a precipice with its shoddy financial foundation, the two big bonders got pushed by hugely over-budget films.

Film Finances disaster came in the name of “The Adventures of Baron Munchausen,” the Terry Gilliam-helmed fable that managed to go $ 20 million over-budget.

Completion Bond got whacked by “Hoffa,” the Danny DeVito and Jack Nicholson pic, and “Malcolm X,” whose budget shortfall sent director Spike Lee asking for more money from deep-pocketed friends.

Battle-weary, bonding companies today seemed to have taken the lessons to heart.

Rebates are a rarity and “the guarantors are not letting the contingencies be eroded,” says Joan Stigliano, senior VP at Intl. Film Guarantors and a former Completion Bond exec.

“I think it got to the point where people realized it got ridiculous,” she adds.

Having been burned, bond companies today aren’t about to make the same mistakes.

“Now they’re saying, ‘We don’t want to own movies. We don’t want to make anything. We just want to keep our little percentage,’ ” says Levy. Part of the circumspection comes from the bonding companies’ backers tightening the reins.

Lloyds of London, which insures Film Finances, increased its rates on the company, a cost Film Finances passes on to customers. And Transamerica Insurance Group, which owned Completion Bond in its final years, recognized it wasn’t making any money bonding films and pulled the plug.

To many, the completion bond business today looks a lot like it did years ago , when Film Finances was the only game in town.

“The pricing is now what it used to be 10 years ago,” Soames says. “It’s just gone back to square one.”

And the venom that was spewed in the heyday of competition seems to have vanished. With prices backup to healthy levels, the bonding companies seem content to pass on business that looks bad or is itching for a better deal.

“IFG seems to approach the business from a more sensible approach to price,” says Soames. “I think they realize there is not much sense in price-cutting. And we wouldn’t participate in that again, even if we could.”

For all its troubled history, the completion bond business is absolutely necessary for independent films to be made. And even though the price-cutting benefitted moviemakers at the time, most recognize that a healthy bond business, even with higher prices, is better than no bond business at all.

Viable biz

“It looks like it will be a financially viable business and will be around for years,” says John Hyde, chief executive of MCEG Sterling Entertainment, a company that recently emerged from bankruptcy to make three soon-to-be released thrillers. “So you don’t have to make plans in your medium- and long-range planning for problem pictures.”

The bonders, too, see the benefit beyond their own fiscal well-being.

“The crisis really caused people to sit up and assess the kind of service bond companies provide,” says Stigliano. “Clearly, among independent producers, there is a realization that they need a healthy bond market.”

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