Completion Bond Co., the film industry’s largest completion guarantor, is officially dead.
Clearing up months of rampant speculation as to the fate of CBC, insurance giant Transamerica told Daily Variety that, while its subsidiary will honor its commitments through completion of production and delivery, it will write no new business.
That development will have tremendous impact on independent producers, who rely on completion bonds to get their films financed. In the near term, CBC’s departure will mean higher rates charged by a dwindling number of suppliers. In the long term, it will result in stricter underwritings that may exclude all but the strongest independents.
Some guarantors warn that if the industry is unwilling to adapt to such changes, it may spell the end of the completion bond business.
“If we can’t get a reward for our risk, you may not see completion bonds in the future,” warned Michael Segal, president of Intl. Film Guarantors. “The industry will be forced to come up with alternatives — substantial letters of credit or pledges of corporate assets against the budget — which means only the major independents will be able to satisfy the bankers.”
John Miller, head of Chemical Bank’s entertainment lending unit, agreed. “The production community has gotten spoiled by artificially low rates,” he said. “They’ve got to understand the importance of this facility and that the only way it’s going to survive is if the rates and terms start making sense for everyone involved, including the providers.”
While cut-throat competition has driven rates from 6% of the production budget to below 1%, prices are starting to rebound. Segal said IFC, which is reinsured by Fireman’s Fund, is charging 2.5% to 3% for productions under $ 5 million and 1.5% to 2% on larger productions. He said those rates will rise — by as much as 50% — as reinsurance costs increase.
Miller said that getting rates back up to a reasonable level will encourage insurance companies to look at bonding as a viable business.
Until then, providers will be hard-pressed meeting the demand for completion bonds. Martin Fink of Complete Film Corp. (the in-house bonding adviser of Carolco Pictures) estimates that in 1993 there are already $ 1.25 billion worth of domestic films in production that require completion bonds.
In its heyday, CBC underwrote more than 100 films a year and split the lion’s share of the completion bond business worldwide with industry veteran Film Finances.
Completion Bond Co. was founded 12 years ago by Bette Smith as an alternative to Film Finances, which had ruled the completion bond market since 1950. Smith parted ways with Fireman’s Fund in 1990 and sold her company to Transamerica for a reported $ 20 million.
But Film Finances is now constrained in its underwriting efforts because of problems at its reinsurer, Lloyd’s of London.
While Film Finances works to get its house in order, IFG is left to pick up the slack.
In the past, IFG bonded only about a half-dozen pictures a year. Even if the company dramatically ups its underwriting efforts to 40 or 50 pictures a year, that still leaves a lot of films that will not be able to get bonds.
“There are going to be a lot of lower-priced films that are fully financed that simply aren’t going to get made,” concluded Robert Mintz, who advises producers on the bonding process.