America may be experiencing its worst financial turmoil since the Great Depression, but the state of indie film financing isn’t as dire. Sure, the boom times are over, hedge funds have pulled back, and the enormous amount of equity that recently flooded the movie marketplace is history. But strong projects, even in today’s volatile climate, will continue to find coin.
“If a producer has the right film, with the right cast, with the right budget, it’s going to get financed,” says Imperial Capital Bank’s David Hutkin. “I don’t think people are saying the same thing for real estate or corporate deals. So from our perspective, business hasn’t changed.”
While investment banks are tanking, long-standing banking institutions with film financing records, be it JPMorgan or Comerica, are not going anywhere, say insiders.
“They may be getting a little stricter in how much gap they’ll lend,” says Oceana Media Finance’s Myles Nestel, “but in general terms, banking presales and gap are still very much in place.”
But for those banks that are continuing to lend, pricing is going up — with upfront fees and interest rates both increasing anywhere from a half a point to as much as a point and a half, according to one insider — all of which can escalate budgets.
Banks are also becoming more selective in the projects they take on. Comedies, action, horror and thrillers are easier to finance, but dramas require the involvement of major actors. “All those themes that used to dominate the independent space — death, suicide, social causes, women’s issues — are tough to get financed. I can’t get the presales or have the confidence to cover my gaps,” Hutkin says.
While senior lenders continue to exist, especially for films under $30 million, there’s some skepticism about the ubiquity of mezzanine investors. The mezzanine layer, which sits right behind a bank’s senior debt, is more difficult to secure these days, say financial specialists. Senior debt and soft money from location incentives can make up 75% of a budget, say some, but it’s the last 25% that’s tougher to find.
Oceana’s Nestel says his mezzanine financing business remains in healthy shape — with a few key projects at AFM, including Gela Babluani’s thriller “13,” Michael Cuesta’s horror pic “Tell-Tale” and David Mackenzie’s “Spread,” a comedy starring Ashton Kutcher — but he believes other mezzanine players are going to contract in the next year or two. That means “there’s going to be a lot more competition for producers to find the best product with the best casts,” he says.
Several coin experts also believe the equity investors looking for movie biz glitz are fewer and far between these days. “I think the new breed of equity is sophisticated,” says Nestel, who adds that several high-net-worth individuals, to the tune of $300 million-$400 million, have asked Oceana to manage their money.
“Equity is not going to just write checks. They want structure, diligence and risk mitigation and want to be involved with a group.”
Joseph Cohen, a former investment banker and the co-founder of EFS Advisers, which manages broad-based mezzanine fund EF Solutions, doubts that many new wealthy individuals will be entering the space right now.
“I think it will slow down dramatically, because financing only makes sense if you can leverage your equity, and your ability to leverage your equity has been reduced dramatically at the moment,” he says. “But there’s still a lot of rich Chinese, Indians, Middle Easterners and Russians out there, so who knows?”
A new type of investor could be emerging. “A lot of people who are interested in coming into the business are really looking for opportunities with entities in distress right now, so they’re looking at it as a financial trade rather than getting into the movie business,” says Cohen’s EFS partner Harris Maslansky.
The shakiness of foreign markets is also presenting challenges to lenders, which may affect the amount of available coin.
Comerica senior veep Jared Underwood says the bank continues to lend steadily against presales and other calculable revenue streams, “but what you worry about in today’s market is how do you know that these companies, that normally are reliable buyers when a movie is ready, can pay you?”
EFS’ Cohen also sees a “slowdown in pay schedules” from abroad. “The foreign distributors are really drawing it out,” he says. “So our analysis has gotten more conservative, which means for the same deal we would lend a little bit less today than we did six months ago.”
Together with the downturn in acquisitions — both domestically and overseas — and the economic meltdown, Capital Bank’s Hutkin says “people are not as free-flowing with their cash as they would have been six months ago.”
But then again, everything is subject to change. “It could get better, or it could get much worse,” says one coin expert. “If there was ever a time in the history of capitalism that I would say I have no idea what’s going to happen, it would be now.”