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AFM: Investors on the Hunt for Worthwhile Product

Speaking recently at the Zurich film festival, Los Angeles entertainment lawyer Lindsay Conner declared, “It’s a golden age for film finance.”
Strong box office, stable TV revenues and the rise of VOD, combined with low returns elsewhere, are bringing investors flooding to the film business.

After the great contraction of 2008-10, the banks are back in force and rich individuals are splashing their cash on film production.

“There’s a substantial amount of equity and debt financing available for films,” Conner says, citing a slew of recent deals to support studio slates, newly formed companies and individual projects.

Such bullishness may come as a surprise to indie producers, who are finding it harder than ever to put together packages that distributors want to buy.

“We’re in the most difficult time in which I’ve worked in my entire career,” said veteran sales agent Alison Thompson, above, in a keynote address at the London Film Festival.

But Myles Nestel, CEO of sales and financing outfit the Solution Entertainment Group, says that’s no contradiction. “From a financing perspective, it’s never been better,” he says. “But it’s not about the money; it’s about the talent. The challenge right now in the independent market is getting talent to commit and stay commited.”

“There’s a misalignment of supply and demand,” agrees Union Bank’s Bryan LaCour. “There’s a lot of liquidity in the market, but not that many investment opportunities.”

Union Bank is coming off its biggest-ever year of movie financing in 2013, but LaCour estimates that 2014 will be 30%-40% down from that peak, with project volume at its lowest level since 2010. “Demand from the banking side is grow, grow, grow, and there’s a lot of money willing and available to be put to work, but there’s less product being made.”

“It’s become much more difficult to put together creative packages with the kind of casts that the foreign market is looking for,” he says. “On the buying side, the demand is there, but it’s highly selective, and has become much more so. Five years ago, we could put together a list of 15 key names they wanted; now that list has dwindled to five.”

In some cases, debt financiers are being muscled out by high-net-worth individuals. “Most of what we’re seeing this year is movies 100% financed by equity,” Nestel says. “Certain equity partners would rather own the whole film than pay expensive debt costs.”

“Producers who finance entirely through equity are paying the price for that,” cautions Lisa Wolofsky of National Bank of Canada. “Debt is very reasonably priced right now. Equity is only less expensive if you’re unsure how your movie is going to perform, because you’re giving away a lot of upside. If you’re confident in your projections, you want to use debt to participate in the profits.”

Nestel notes that Solution has turned down some recent projects that came packaged and fully financed with equity. “The scripts weren’t good and we knew we wouldn’t be able to sell them,” he says.

Debt financiers have recognized that with more money chasing fewer projects, they need to become more aggressive.

After putting more than $300 million into more than 40 international projects since she joined National Bank of Canada in 2011, Wolofsky has now got the greenlight from her bosses to take on more risk. Details will be announced at the AFM, but Wolofsky explains that the bank is moving into mezzanine/supergap as well as bridging deals.

Union Bank has also moved into mezzanine financing, along with offering more liberal rates on pre-sales and gap.

Boutique lender 120dB Films, celebrating its 10th anniversary this year, has raised its gap ceiling. “Instead of 20%-25% maximum, we’ll do 25%-30% maximum,” says 120dB co-topper Peter Graham.

Graham notes that 2014 has been “our best year ever, in deal volume and quality of films,” but says that future prospects are unclear. “It’s a confusing time,” he says. “The good news is, there’s still a business, not just independent film production, but also quite a bit of independent TV now. But a lot of films are being made with all equity, so as a debt financier, you have to be nimble and flexible.”

The company prides itself on being quicker to approve deals than the banks. “Producers will pay a bit more if a deal needs closing fast, in five days not six weeks,” Graham says.

Given the surplus of cash chasing projects, LaCour suggests there’s an opportunity for savvy producers “to figure out a way to increase the level of projects going into production.” That may involve reducing budgets to align better with what foreign markets are willing to pay. Convincing foreign buyers to take a risk on new talent would also help.

But when finance capacity runs ahead of market demand, the danger is budgetary inflation and over-production.

As Conner says, “All this finance is allowing more films to get made than would otherwise be the case, but whether in the long run those films succeed, only the market will decide.”

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