Smarter money counts on better deals

Intl. Film Finance Forum presented by Winston-Baker in association with Variety

If there’s one bit of news that will have filmmakers leaning forward in their seats at the International Film Finance Forum in Cannes, it’s that the market for some sources of capital might be coming back.

“I think during and following the financial crisis, the bank lenders pulled back substantially – there was very little money available for new deals, it was very expensive and the kind of restrictions on the type of deals they would do were very tight,” says Stephen Scharf, partner at O’Melveny & Myers, LLP, one of the speakers at the forum (which will be presented by Winston Baker in association with Variety).

Scharf thinks that is starting to change, with senior lenders coming back and there being a more robust market; new deals are beginning to emerge.

“But it will still be more expensive than it was in 2008, with tighter covenants,” Scharf adds.

He related how, in regards to private equity funds and hedge funds, there was also a large pullback; the number of deals they had gone into had not really performed that well. As far as the future, Scharf doubts there will be a resurgence; that those sources of capital will not be as active as they were before 2008.

“Then there are strategic investors, people who are users of content and are in the business to lock up distribution rights or content, like Netflix, Hulu, Amazon or cable channels or foreign distributors or owners of movie theaters in the U.S.,” says Scharf. “They want to guarantee access of content to get the content they want.”

Another category of investors Scharf lists are high net worth individuals.

“These investors have made their fortune in other areas, but are interested in investing in the film industry because they find it interesting for maybe non-economic reasons, and that is a source of capital that will continue to invest in the industry,” says Scharf.

As to raising finance in Asia, Russia, India, Europe and the Middle East, Scharf thinks some countries might pose a problem.

“Russia, Asia and the Middle East are not historically major investors in the entertainment industry, and while there have been some investments already made, it’s not clear to me that they will be long term major sources of capital for the western industry,” says Scharf.

Broderick Johnson, co-founder of Alcon Entertainment (“The Blind Side”), seems to be in agreement about some of the senior lenders coming back.

“Like the banks are coming back, but they are being much more conservative in their lending practices. The U.S. has been fairly aggressive in their tax subsidies, but the financial situation has started to put pressure on state budgets; therefore some of the tax incentives have been reduced or limited in scope,” says Johnson, another speaker at the film finance forum.

“Other countries are becoming more aggressive in their subsidies and incentives to lure films back overseas, like the UK and Germany. The pendulum may swing from doing a lot of films in the U.S. to going overseas again. The challenge is that it’s offset by the exchange rates, which has not helped in movies going overseas.”

As to individual states in the U.S. and their incentives, Johnson thinks that the states that have committed to tax programs and have built up a good crew base will continue to support those programs; for states that have not been as successful, Johnson believes they may reduce the percentage or reduce the amount available for subsidies.

In regards to raising finance in Asia, Russia, India, Europe and the Middle East, Alcon Entertainment is observing those emerging markets “very carefully” as to any strategic opportunities.

“We haven’t done anything specific to pursue financing from those countries other than the traditional presales of international rights. Alcon has a pretty strong capital base and a lot of equity, we are not aggressively looking for money from individual firms,” adds Johnson.

Brian Oliver, president of Cross Creek Pictures (“Black Swan”) and another speaker at the film finance forum, doesn’t think the credit crunch has recovered as much as people have made it out to be. As far as capital, his company is involved in private equity.

“Being pure private equity, this allows us to apply it to many different parts of the financing,” Oliver says.

“What we’re financing nowadays, we can figure out what we can get from the foreign market, and between the foreign market and soft money we can fill in the rest of it (gaps) and we can figure out with what budget we can make the movie.”

Oliver also agrees that the market will not be like it was before 2008.

“The financial crisis has changed film markets forever, budgets have come down and I think gross profit definitions have changed forever.”

In regards to the film market in the past few years, Tim O’Hair, head of production at Parallel Media (also a moderator at the film finance panel) believes that as the market recovers and commodity prices rise, there will be a rise in capital willing to invest in entertainment.

“What you’ve seen is smarter equity the last few years; the companies are more in tune with the need to mitigate risk and structure smart deals,” O’Hair relates.

“We are seeing fewer, better pictures being made, with hopefully a better chance of securing Northern American distribution.”

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