Business models evolve as local pic industry adjusts to leaner times
For Spain’s defiantly dressed-down film industry, an early July seminar in Madrid offered an extraordinary sight: rows of suits, including bankers, lawyers, accountants and tax gurus.
The seminar, a New Look at Spanish Film Production Financing and Investment, signaled more than a sartorial sea-change.
The drip feeds of subsidies and, from the past decade, TV finance, rep 80% of an average Spanish films’ financing, according to consulting firm Deloitte.
Now, however, producers and public orgs are finally getting serious about courting outside finance.
The move marks a reaction to leaner times and anticipates new film business models. And it accelerates Spanish cinema’s already-in-motion makeover from a primordially cultural enterprise to a primordial part of a consumer economy.
A film’s financing typically involves debt, mezzanine or gap financing and equity, says David Quili at Wiggin, a London media law firm.
Unlike in Germany, bank gap financing remains rare in Spain, says producer Juan Gordon. The country’s new finance push mostly revolves around enhancing credit facilities or capturing private equity investment:
n Audiovisual SGR, a part-state financed mutual guarantee fund underwriting banks’ loans to producers, has doubled its maximum guarantee per company to e1.2 million ($1.5 million).
n Previously largely lending via third-party banks, state bank ICO is launching a facility, ICO Direct, which offers producers up to $769,200 per film.
n Producers org Fapae has initiated talks with the European Investment Bank to establish credit lines for European co-productions.
n Spain’s ICAA film institute is studying the creation of a Spanish completion bond.
n Last September, Ignasi Guardans, ICAA director general, sought and received a binding resolution from Spanish tax authorities that Spain’s AIE special interest group 18% tax-break vehicles can be used for film investment.
n From ICAA to Fapae, film orgs are reaching out to the financial sector, tubthumping, as ICO’s Gonzalo Serrano pointed out at the July seminar, that the “film industry is one of the least problematic lending sectors in Spain.”
n Fapae is negotiating with Telefonica for the Spanish telco giant to create an AIE-driven film investment fund in Spain, and also invest via its foreign operations in Brazil, Argentina, U.K. and Italy.
Guaranteeing recoupment on investment, and allowing the telco to tap new content and exploit market opportunities, the Telefonica fund would plow “dozens of millions of dollars a year” into the Spanish film industry, says Fapae prexy Pedro Perez.
The deal just has to be sealed.
AIE tax break usage is already proliferating. At Barcelona’s Arcadia Motion Pics, Ibon Cormenzana and Angel Durandez, both former Arthur Andersen execs, have now arranged tax deals for eight films.
Morena Films has mounted AIE investment on three movies, says the shingle’s Pilar Benito.
It is finalizing AIE coin on another three films and is also working with a Spanish bank on an AIE vehicle for an eight-to-nine movie slate of both its own films and third-party pics.
AIE investment can be substantial: Lazona and Arcadia have pulled down $513,000 in tax-shelter coin from around 10 high-net-worth individuals to complete financing on “23 F,” a step-by-step chronicle of Spain’s Feb. 23, 1981, putsch.
In its film-finance drive, the Spanish industry is merely making a virtue out of a necessity.
Credit-crunched themselves, Spanish banks are increasingly restricting film loans to SGR-guaranteed movies or major movie companies with profit margins.
It shows. Since 2000, ICO have operated low-interest credit facilities for third-party banks lending to the sector, often discounting ICAA subsidies. In 2007, ICO loaned $51.4 million; in 2009, $35 million.
ICO made just 14 film loans through July.
The problem isn’t money. It’s perceived risk, says ICO’s Serrano.
Spain plans one of the most draconian austerity plans in the EU, slashing deficit from 11.2% of GDP last year to 6% in 2011.
Subsidy caps per film have been slashed 25% to $1.9 million. Under current economic conditions, direct feature film production subsidies will not be reduced, Guardans insists. But tax-driven investment “can be sold more easily to public opinion,” he adds.
“From 2011, we’ve got to begin to establish a new film financing model in Spain, with a bigger presence of private investment and crucial ICO leverage to cover any state financing shortfalls in these crisis years,” Perez argues.
Attracting outside coin is no slam dunk, however.
“The main problem is bankers’ lack of specialized experience or skills. They don’t know how to deal with production or completion risks, discounting TV pre-sale contracts or arranging completion bonds,” says Christophe Vidal, director of a main lender to the Spanish industry, Paris’ Coficine-Natixis.
Also, most Spanish subsides are triggered by movies’ box office and paid two years after a film’s commercial release. So banks are being asked to bridge finance films over 48 months, compared to six to eight months in France, Germany or Britain.
“No company can predict its balance sheet in 48 months,” says Vidal.
“Private funds can provide solutions to a sustainable industry but they cannot create a sustainable industry,” Joel Thibault at Paris’ Backup Films said at the July seminar.
For many, fixing Spain’s film financing means fixing the Spanish film industry.
“The sector has to consolidate,” says Luis Jimenez, at Deloitte Madrid. “The future belongs to integrated companies, with producers partners, which inspire confidence in the financial sector.” Producer Gerardo Herrero agrees.
“There has to be an agreement between content producers and aggregators and wideband operators,” adds producer Fernando Bovaira (“Agora,” “Biutiful”). “There are just too many interests and (too much) money at stake.”
Or maybe brute logic will win out.
“Film banking is risky, so credit’s expensive and margins can be good,” says Vidal.
Herrero agrees: Banks are losing money not working in film.
The large question is whether they’re losing enough money to care.