New strategies for funding films

2011 saw financiers return to the movies, cautiously

From dashed hopes to confidence boosts, the year’s biggest film finance stories revealed new players and strategies in funding the movie industry. Wall Street may have fled Hollywood in the wake of the economic collapse, but players like New Regency and Legendary are showing that bank money has started to trickle back.

At the same time, Miramax’s film-backed securitization indicated that institutional investors are willing to start banking on the promise of digital, while Relativity’s stalled talks with JP Morgan Chase & Co. proved just how delicate the dealmaking process can be. This year’s biggest stories in film financing offer hints of what’s to come in this fast-changing sector.

Summit refinancing: In March, Summit Entertainment closed a $750 million deal that allowed the company to unshackle itself from itself from some of some of its debt and increase feature production. Company raised about $1 billion four years ago — a mixture of debt and equity — that helped launch it as a full-fledged production and distribution operation. Since then, Summit has released four “Twilight” pics, along with solid performers “Red” and “Source Code” and Oscar best-pic winner “The Hurt Locker.” For its more recent round of financing, led by JP Morgan and UBS AG, ratings agencies Moody’s Investors Service and Standard & Poors expressed some concern that the “Twilight” franchise is ending in 2012. Both agencies reviewed the loan, which was ultimately cut by $50 million from $800 million. The re-fi will also help Summit run its day-to-day operations and pay a cash distribution to its largest investors, which include Participant Media and private equity fund Rizvi Traverse Management.

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Miramax securitization: Miramax’s $500 million debt raise through Barclays Capital sent a signal to observers that the financial community was seeing more value in digital licensing pacts for older content. Company, which investors purchased from Disney for $663 million just one year ago, has signed more than $300 million in new licensing agreements this past year, much of which came from Netflix and Hulu. That helped give analysts confidence in the company’s ability to ink hundreds of millions in new pacts over the next decade, and financial advising firm Duff and Phelps valued Miramax at more than $813 million this summer. While the company is developing about 20 projects with outside partners, Miramax has no plans to start funding production, instead focusing on exploiting its 700-title library. With only a handful of major players, though, the question remains whether the digital space will expand enough to support Miramax’s projections.

Legendary gets new credit line: As studios increasingly look to share performance risk, Legendary’s recent credit facility gave partner Warner Bros. a $700 million reason to relax. Company will use that money, raised by JP Morgan and Bank of America, to continue co-financing high-profile pics, including a potential third “Hangover” installment, Superman reboot “Man of Steel” and “The Dark Knight Rises” for Warner Bros. to distribute. But Thomas Tull’s company has also been developing a growing internal slate, including “Godzilla” and “World of Warcraft.” It has also been ramping up efforts to expand into other platforms such as TV, digital and publishing, where it would focus on the type of high-profile pop culture fare currently favored by risk-averse producers. Observers also took the deal as a sign that banks were loosening the purse strings.

And so does New Regency: Many of the bankers who attended the September premiere of 20th Century Fox’s “What’s Your Number?” had their own answer: 500 million. That’s how much the film’s production company, New Regency, raised in its credit facility this fall through lead bank JP Morgan and co-lead Bank of America. That’ll help the company, which has seen a number of executive shakeups since August, as it marches into a new direction.Among them was the news that co-chairmen Bob Harper and Hutch Parker would exit by year’s end, and the subsequent installation of former Paramount exec Brad Weston as CEO. Underlying this has been a pledge by company founder Arnon Milchan to take Regency in an edgier direction, favoring darker, riskier material like “L.A. Confidential” and “Heat,” from its early days.

Relativity/JP Morgan talks stall: When news broke this summer that Relativity Media wanted JP Morgan Chase and Co. to raise more than half a billion dollars on its behalf, many had doubts that the deal would get made. Relativity Media founder Ryan Kavanaugh has many supporters and detractors in town, and some sources with knowledge of the deal told Variety that it was aspects of this larger-than-life persona that gave some senior execs at JP Morgan pause. As the weeks dragged on, the prospect of a JP Morgan-backed deal to buy out hedge fund Elliott Management’s stake in Relativity became increasingly unlikely. And in November, multiple sources in the entertainment financing community with direct knowledge of the talks told Variety that reputational risk and financial concerns spooked some senior execs at the bank.

Even without JP Morgan, Relativity could still complete its planned buyout of Elliott with a different investor. And while the prospect of a JP Morgan/Relativity deal strikes many as unlikely at this point, some sources close to the talks insist the two companies are still in discussions. In November, investor Ron Burkle made a substantial loan to Relativity for an undisclosed amount.

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