Potential worry points remain as optimism increases
Hollywood, like the rest of American industry, is weary of the what-ifs regarding a U.S. debt default.
With lawmakers on Capitol Hill entangled in negotiations to come up with a package to raise the nation’s debt ceiling, the mood among dealmakers and in corporate suites is one of concern — but not enough alarm to enact contingency plans for a worst-case scenario.
Sunday evening, President Obama and congressional leaders announced a deal in which $1 trillion would be trimmed in federal spending over the next decade and a bipartisan committee would be formed to recommend even more cuts in a report due in November. Congress likely will vote on the deal today.
There is plenty of talk throughout showbiz about just what a default would mean.
If the U.S. government fails to meet its debt obligations, and the nation’s debt rating is downgraded, it could result in higher interest rates, tighter credit markets, a slower pace of overseas investment in show business and, reflecting the market as a whole, a dip in the share prices of media stocks. Even if a deal is reached, there is worry that the package of budget cuts could trickle down to the state level and put even more pressure on local lawmakers to scale back incentive programs.
“We haven’t heard or observed any lenders of companies holding back on lending or investing until Washington makes up its mind,” said Patrick A. Russo, principal with the Salter Group, the financial and strategic advisory firm. But, he added, “This is uncharted territory. The longterm ramifications are unknown.”
Commented Stroock partner Matthew Thompson, who helped finalize a handful of financing deals in recent weeks: “No one is saying, ‘Oh my God. It’s going to happen. What are we going to do?’?But whenever there is financial uncertainty — and this is financial uncertainty — those that control capital look at the situation carefully.”
Thompson’s fear is that the spigot of money flowing Hollywood’s way will dry up the same way it did between 2007 to 2009, as hedge fund and Wall Street investment in slate and other deals slowed. Independent producers, in particular, felt the pinch and were unable to raise money to finance projects.
The Great Recession period belied conventional wisdom that the entertainment business was immune to severe downturns, and the fear is that Hollywood will also be hurt by another economic slump. Downgrading the U.S. credit rating — which is a possibility even if lawmakers reach a deal at the eleventh hour — could lead to higher costs of borrowing or of holding onto debt.
The market has been jittery in the past week, and media stocks could be battered if the deadline passes and no action is taken.
“Any impact on the media sector would almost certainly be collateral,” said Tuna Amobi, equity analyst Standard & Poor’s. “It would have very serious economic repercussions that would spill over on media stocks.”
The historic lows in interest rates in the past year have helped media congloms improve their balance sheets, and that could help them brace for any new downturn, Amobi said.
“The bigger companies have significant access to backup liquidity,” said Amobi. “Companies that have steady, predictable growth where affiliate revenues are strong could also have a buffer zone. The borderline companies, with speculative grades — those are the ones that will probably see a much more severe fallout from this. All of these negative things would probably take time to play out.”
If there is an upside to a default, it would be in the value of the dollar. Already, concerns about a U.S. debt crisis, along with the release of poorer-than-expected U.S. growth figures, helped drive the Euro up around 0.5% on Friday to $1.43.
A continued decline actually could attract more international investment in Hollywood — something that already has been accelerating — and boost studios’ returns from foreign markets like Europe that are a key part of international box office. Those positives, however, may be small solace if the U.S. currency’s hallmark of stability is tarnished.
“If America defaults on its obligations, it could lead to a lot of overseas banks dumping dollars for currencies they view as less risky,” said Manatt, Phelps & Phillips partner Lindsay Conner, who specializes in structuring movie and TV finance deals. “It makes dollar-denominated investments riskier at best and less attractive at worst.”
Although overseas interests may make a run at media investments with a weaker dollar, “in the short run, this kind of negative pressure on the dollar won’t be beneficial,” said Conner.
Around the world, that may sound like an understatement. But so far, foreign media professionals have a common reaction to what is going on in Washington: They’re perplexed.
“I refuse to believe it,” said Martin Moszkowicz, head of film and television at Constantin Film in Germany. “For some reason I still believe human beings are not that stupid. There will only be losers.”
Constantin doesn’t have a contingency plan for a U.S. default, but it does have one for currency exchange fluctuations.
“What we’re doing at the moment is hedging those currency rates to the extent that’s possible,” said Moszkowicz.
A cheaper U.S. dollar could make it more attractive for production in America, as there is “the international production circus that is moving around looking for the best possible deal, and currency exchange rates are a vital part of that,” Moszkowicz. said.
Riccardo Tozzi, head of Italian producer Cattleya and prexy of the Italian motion picture association Anica, said of the situation: “None of us here thinks that Americans are crazy enough to create a problem for themselves that they don’t have. … We Italians are so used to political polemics driven by ulterior motives that to us it’s clear as daylight that this will all be resolved at the last minute.”
Tozzi said Italian film production is “as sheltered as it could possibly be,” because government film financing comes from a percentage of a broad gasoline tax and is not directly affected by national belt-tightening measures.
Of course, he warned, “If everything goes belly up, nobody is sheltered.”
The debt endgame has created other sorts of friction.
The broadcast lobby in Washington is still fearful that a deficit reduction plan proposed by Senate Majority Leader Harry Reid (D-Nevada) will include a provision to raise revenue by auctioning off broadcast spectrum, an idea the lobby opposes unless adequate conditions are defined.
And with $1 trillion-plus cuts to spending possible in a debt deal, such reductions could trickle down to the state level, where champions of film-incentive programs already have had a tough time defending their tax credits.
“It’s possible that (states) are going to have to make some hard decisions pretty fast,” said the Salter Group’s Russo.
If the ultimate impact on entertainment is unknown, showbiz has already sort of weighed in on what would happen to the rest of the world. In a clip from “The West Wing” circulated heavily among D.C. journos this week, the fictitious Bartlet administration faces a last-minute vote on the raising of the debt ceiling. Richard Schiff’s Toby Ziegler character lays out the worst-case scenario: “The immediate collapse of the U.S. economy followed by Japan sinking into the sea, followed by a worldwide depression the likes of which no mortal can imagine. Followed by week two.”