The meltdown of Deutsche Bank’s $450 million slate financing deal at Paramountis clearly a sign of the brutal economic times.
But what does Deutsche’s scrapping of its entire film finance unit mean to studio operations for the foreseeable future?
The short answer is that while the entire rug isn’t being pulled out from under Hollywood, a pullback among large institutions like Merrill Lynch, Citigroup and Deutsche does appear to be under way.
But deals will still get done, especially those predicated on a “borrowing base” that emphasizes library values as opposed to projected revenue. Hedge funds and private equity, especially in emerging global economies, are still keen to invest in films — witness DreamWorks’ foray with India.
But large institutions like Merrill Lynch, Citigroup and Deutsche — who were busily securing slate deals, syndicating and packaging senior debt and propelling Wall Street’s big movie bets earlier this decade — now have bigger fish to fry.
Buffeted by everything from a lack of liquidity to subprime woes to the bailout of Fannie Mae and Freddie Mac, these firms have posted tens of billions in writedowns and laid off hundreds. And new managers seeking stability often have no affinity for Hollywood.
“To this day, film is viewed as an exotic asset class by a lot of bankers,” says Isaac Palmer, a former Par and Fortress exec who is now managing director of boutique firm MESA (Media and Entertainment Strategic Advisers).
Laura Fazio, head of Deutsche Bank’s film financing unit, got caught in just such an undertow. After moving with her team to Deutsche last year from Dresdner Kleinwort in hopes of drumming up new film business, she had the Paramount deal at the one-yard line when Deutsche pulled out.
“It’s no mystery that the demand for riskier structured products has dried up,” says a person close to the aborted deal. “It’s not unique to film financing. We see it in mortgages and other products. There’s a diminished appetite for capital-type structured products.”
Amir Malin and Ken Shapiro‘s hedge fund Qualia Capital provided all of the equity and a part of the mezzanine financing for the Par-Deutsche pact. They could still theoretically find another partner.
Ditto for Paramount. Absent a new senior lender to replace Deutsche Bank, it will have to fill the gaps left in certain pic budgets, even if it means (gasp!) picking up the tab itself.
“A year ago, the hard part was getting the equity and the easy part was the senior lenders,” Palmer says. “Now it’s the opposite.”
Under the terms of the deal, Deutsche would have funded 25% of each film on a slate of Paramount pics, capped at $30 million per pic, totaling roughly $200 million a year.
Par says it balked at the deal points and has decided to pursue alternative sources of coin.
Deutsche had its fingers in a number of Hollywood pies. It committing to the initial loan on Ryan Kavanaugh‘s Relativity Media Gun Hill I fund, which co-financed a slate of Sony and Universal pics.
Deutsche Bank still has a structured product group, of which film financing had been one business. Bankers there will oversee any remaining film financing deals.
The bank also remains an active player in showbiz through its M&A practice. It most recently advised NBC Universal on its leading an acquisition of the Weather Channel, and News Corp. on the sale this month of seven TV stations.
Still, 2008 will go down as a transition year. The specialty film landscape looks a lot different without Time Warner, Paramount Vantage and others. The finance landscape has likewise shrunk.
And a lot of the name brands that survive aren’t nearly as eager to hobnob in Hollywood, at least for the time being.
Lionsgate vice chairman Michael Burns, a banker before he began running the mega-indie, sees the Wall Street investment firms staying in the mix — in the long term.
“Credit markets tighten and credit markets loosen up,” he says. “In a belt-tightening situation, you see consolidation and people are stricter about where they want to put their money.”