Demand for P&A high, deals scarce

Financiers remain selective in choosing films

These days, indie distributors need all the help they can get.

With the costs of releasing a film rising just as companies are increasingly scrutinizing their bottom lines, the need for outside investors to cover prints and advertising expenses has never been greater. And though the demand exists, the players doing P&A lending are currently few and far between.

From Qualia Capital, a private equity group that has made $100 million in P&A commitments since launching in 2006, to Australian media giant Omnilab, which put up marketing costs for such Lionsgate releases as “The Bank Job” and “W.,” funders are shrewdly looking for the quicker recoupments that the “last in/first out” P&A deal can afford.

All pacts are structured differently, of course, but typically outside funds will put up P&A, a distribution fee comes off the top, and then they’ll recoup their equity from all sources ahead of everyone else, with possible returns, according to observers, from 12% to as high as 30% — numbers that appear attractive to investors.

Endgame Entertainment CEO Jim Stern, for example, says P&A financing looks like a good investment that he’d potentially pursue. “From a numbers perspective, it bears out,” he says, “but that being said, are we talking about $10 million or $30 million in P&A? The returns shift depending on how much you’re spending.”

On the distribution side, one major factor contributing to the increasing need for outside P&A investors is America’s Sarbanes-Oxley accounting law, enacted in 2002, which requires film companies to expense 100% of P&A expenditures in the quarter when the movie is released — before collections actually begin. Thus, by not having to write off those dollars on their filings, companies are able to be more fiscally responsible to their stockholders.

Liberty Media’s Overture Films, for example, is on the verge of going out to investors to raise P&A, according to chief operating officer Danny Rosett.

“We’re getting cautiously optimistic feedback not just from our existing bank group but some of the investment firms,” he says. “Realistically, if we had tried to do this in January, I think we’d get hit by a buzzsaw, but as money returns to the marketplace, I think we have an opportunity to offer that new capital a P&A deal instead of a production deal.”

With its Starz pay TV relationship, Overture is well positioned to take advantage of such arrangements, as investors look for ancillary guarantees to ensure positive returns.

Joseph Cohen, co-founder of EFS Advisers, which manages the fund EF Solutions, says he prefers P&A deals with entities that have a pay TV deal or some secondary means of repayment, such as foreign distribution, to recoup from. “With DVD sales off 15%-20%,” he says, “pay TV is an important issue.” And given the unsteady market, Cohen believes caps should be included in P&A deals, both in terms of theatrical and DVD marketing spend.

While P&A investments are perceived to be lower risk than production financing, however, ICM’s Hal Sadoff, a former VP in the banking sector, says there are fewer people doing it “given the credit crunch and the fact that it’s difficult to leverage with senior and mezzanine debt.”

In addition to decreased liquidity, lenders also cite the singular, continuing challenge of market competition. “There are still plenty of films out there,” says Omnilab’s Christopher Mapp, who adds that the company has been looking at all of its investments, from equity to senior debt to P&A, differently since as early as October of last year.

While Mapp’s P&A deal on “The Bank Job” was a successful one — partnering with Lionsgate in North America and the U.K., and Paramount in Australia, but only fronting P&A costs for the U.S. release — “that’s not necessarily the structure we would take today,” he says, noting the company’s more aggressive push toward financing its own productions.

“Sure, if the right film comes along, we’re open for business,” he continues, “but I think the deal structures have turned further in favor of the financiers.”

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