Saturated market, rising costs threaten film

Most indie companies emerged unscathed from the big mortgage credit crunch of 2007, but several other factors are impacting independent film financing, from increased competition to prestrike panic.

While the unease around hedge fund-backed deals as a result of the subprime mortgage crash is mostly a studio problem in the eyes of bankers, a few bigger independent companies with slate-type financing arrangements have been affected as well.

“What you’re seeing is that banks have slate deals on the books that aren’t performing as originally projected,” says Jared Underwood, senior VP of Comerica Bank’s Entertainment Group, who arranged Goldman Sachs’ partnership with Michael London’s Groundswell Films and the Weinstein Co.’s Asian Film Fund, among others.

“Although these loans have a lot of equity and mezzanine capital protecting the senior loans, the so-called ‘Monte Carlo simulations’ upon which these funds are based are not performing,” he explains. “If the equity or the mezzanine get burned, these deals will disappear for the senior lenders as well.”

But, Underwood adds, “anybody who has already raised their money has already raised their money, though they might have some concerns down the road in trying to reload.”

Natexis Banque’s Bennett Pozil says mezzanine capital is “on the sidelines” these days, but what’s having more of an impact on indies is “the fear of the strike,” he argues. “The studios are hogging all the actors right now, so they can’t get talent to make their movies.”

The looming work stoppage has also forced busy bond companies to put a deadline on productions.

Film Finance’s Kurt Woolner, who reports that his company is 50% busier than normal as a result of prestrike fears, says independent productions are less at risk from a writers strike than the potential walkout of actors and directors. “Because those (thesp and helmer) contracts run through June 30,” he notes, “we’re bonding productions until the beginning of June.”

Intl. Film Guarantors’ Steve Mangel says his office is barraged with calls asking for scheduling advice in advance of a possible strike. While Mangel adds that IFG is looking at every production individually, he also asserts it won’t bond projects — particularly ambitious or complicated ones — with wrap dates beyond mid-June.

And even without the production increase caused by strike paranoia, the increasingly jam-packed nonstudio sector is seeing a rise in costs. “The money is seemingly there for this ramp-up in production,” Mangel observes. “But what if because of increased competition, a film might have to pay $4 million or $5 million for above-the-line (talent) instead of $3 million? Will the financing be there at the end of the day?”

Money experts say one recent positive development is the rise in U.S. state tax incentives, which has been a boon to indies. Essentially, Rhode Island is the new Romania. “From New Mexico to Connecticut to Missouri to all sorts of places,” says ICM’s Hal Sadoff, “it’s really helped a number of movies get made.”

But Underwood says the boost in business cuts both ways. “The last couple of years have been among the best times to be a producer, because there’s been so much money out there,” he says, “but it’s also a tough time, because once you raise your money, you’re either forced to overpay for new material to produce or you’re competing in a saturated U.S. distribution market with your finished product.”

Imperial Capital Bank’s David Hutkin, however, says the growth has been commensurate with steady foreign presales and financing sources. Hutkin believes it’s “a have/have-not situation,” with “better producers getting better projects,” and overseas distributors effectively creating output deals with those same producers and sales agents. “So those strong players are getting stronger,” he says.

“It’s a much safer business,” Hutkin continues. “You got to jump through hoops to get a deal done even more than you used to, so the deals are better structured, they’re budgeted more conservatively, they’re better cast, there’s more development time going into these films and,” he adds, what is possibly the most important change, “they’re turning out better.”

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