Industry's slate financing pacts slow to a trickle
As sagging giants like Citicorp and Morgan Stanley hit on money sources in Dubai, China and Singapore, Hollywood is fading as a big draw to outside equity.Lately, slate financing pacts have slowed to a trickle on economic jitters and uneven returns. Hedge funds are still willing partners — after all, the movie biz tends to weather economic dips better than most industries. The big news is that investors are exploring ways to restructure deals so they can sleep easier, and the studios are on board. And while slate deals have helped finance upcoming summer pics like Sony’s “Hancock” and Warner Bros.’ “The Dark Knight,” there have been few significant new pacts in the last six months — a period that coincides with a mortgage crisis that erupted last summer. It’s made big lenders skittish and eroded the easy credit that underpins these financing deals. In the past week alone, Citigroup, the nation’s biggest bank, and Merrill Lynch each reported staggering quarterly losses of $10 billion. Deals have also slowed because most decent pics in studio pipelines are already spoken for. Previous slate deals have taken up all the available space. “Depending on when the deals started, most of them are for five years,” notes Terry Botwick, president of Vanguard Films. The writers’ strike isn’t a big concern for the moneymen. So far TV has been hit hard by the walkout, with the film biz relatively unfazed. At first glance, there is evidence to suggest that slate-financing pacts are endangered species. Everyone’s vetting pacts more carefully and trying to offload risk. Hedge funds are backing away from so-called “junior capital” in the deals, which usually include three tiers of investors. The senior debt provided by banks gets paid out first. Hedge funds have operated in the higher-risk and, they’ve found, not-so-high return mezzanine and equity tiers. “When the market was frothy, all these banks did underwritten deals. No one is doing them now and the hedge fund community is skeptical of these transactions,” says one Gotham fund manager. Hollywood heavyweights are willing to negotiate. After all, the trend of belt-tightening by media companies isn’t going to reverse course: seeking outside financial help is now a structural necessity, not a fad. Hedge funds still have bags of cash they need to put to work. So despite the gossip mill about whose deal was rotten and whose investors got scammed, some think hedge fund money could be more durable than other fads like German coin or insurance-backed investment. An early concession was on the distribution fees pocketed by the studios, which have settled to an average of 12.5%, down from the 15% common in original deals. There’s discussion of an “aggregator,” like a private equity firm, bundling the slate deals’ residuals and selling them as a new kind of security. Rather than allowing the studio to withhold certain pics from the deals, “see-all, take-all” arrangements are more common. Some think the deals can be restructured to better align investor and studio by combining slate financing with other investments, like film libraries, production entities or broadcast assets. “They need each other. The studios have huge capital needs and the hedge funds have huge amounts of capital. Something will get hashed out over time that works for everybody,” says one L.A.-based investor. “In the end, it will ultimately make it a better market for film financing. The deals with the studios will get better, the credit markets will come back, and the hedge funds will get in business with people who really understand the business and can negotiate deals with all the players,” he adds. There are certainly horror stories, but some deals have flourished. Dune Capital is enjoying a fantastic run with 20th Century Fox, which has had a string of moneymaking pics. Thomas Tull’s Legendary Pictures is chugging along with WB after a rocky start. Investment Dealer’s Digest named that pact the media industry’s 2005 Deal of the Year. Gun Hill I, which Relativity Media brokered for Sony and Universal, will be modestly profitable, according to Relativity chief Ryan Kavanaugh. Gun Hill II is more problematic as the lead banks are said to be having trouble finding junior partners. A MGM package led by Goldman Sachs and Deutsche Bank collapsed — although the studio’s United Artists did ink a $500 million pact with Merrill Lynch. It’s often hard to gauge from the outside if a deal is working or not. “This is such a black art and nobody who invests wants to tell you that they’ve lost money,” says one industry observer. The writers’ strike is not a factor in the film financing equation — yet. “The strike is having no effect on film slates,” says one fund manager. “This is a TV production strike, not a motion picture strike, unless it goes another few months. “Almost every single studio has their slates identified through most of ’09. If you go studio by studio, only a few films have been held up because of the strike. And once the strike is over, they will get their final polish on a backlog of scripts and get going.” Others are less sanguine about the future of hedge fund-driven financing. Stephen Prough, managing director of Salem Partners, fears the funds will simply refuse to operate in the risky lower tiers of these deals, and will be replaced by something else. “Bank financing has always been there,” but “you’ve got have that junior capital for these deals to get done,” he says. He’s not sure who will step up to the plate next. “Everyone went to the film festival in Dubai and thought maybe (fresh cash) would be from there. But there hasn’t been that much coming from that part of the world.” Dubai and Abu Dhabi, part of the United Arab Emirates, have launched dueling film festivals, clamoring for attention. Last fall, Abu Dhabi and Warner Bros. inked an expansive deal including co-financing for film and videogames. But many are optimistic that the hedge funds are here to stay. “This is an emerging market. It’s two to three years old,” says one banker. It just needs to find its footing. Says another: “I wouldn’t throw the baby out with the bath water.” Dade Hayes contributed to this report.
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