Presentation on theme: "Capital Structure: Financing films Prof. P.V. Viswanath EDHEC June 2008."— Presentation transcript:
Capital Structure: Financing films Prof. P.V. Viswanath EDHEC June 2008
Equity Deals Equity Deals come in many sizes and shapes. A common one is a production-financing- distribution (PFD) deal, which is with a major studio, usually. Independent Distributor Financing is similar to a PFD deal, except in this case the distributor is not affiliated with a major studio. Another one is end-user financing. Finally, talent agencies can act as intermediaries in obtaining equity financing for a package of films.
PFD Agreement This includes Production-Financing and Distribution; its also called a P-D or a Studio Development Production Deal. The first phase is a "Development Deal Memo" between the producer and the studio. The Development Deal Memo outlines the agreement, salary, time schedules, screen credit, and percentage points. A PFD is usually a step-deal – that is, compensation is provided one step at a time, contingent on satisfactory completion of a stage. The studio usually retains the right to withdraw at any point in the development of a film.
PFD Deals When a deal is signed, the director is paid a small amount, to cover the period until the film is either green-lighted or put in turn-around. If the film is green-lighted, the producer might be paid the remainder of his compensation according to a schedule. For example, 20% over preproduction, 60% over principal photography (or production), 10% on delivery of the first cut of the picture and 10% on delivery of the film to the distributor. The producer may also get a cut of the gross or net profit, depending upon his clout.
End-User Financing End-User financing is when a theater, cable or television station will put up money in exchange for equity percentage participation in the film's revenue stream for specific markets. This is comparable to pre-sale financing, except that in the latter approach, there may be no funds provided up- front. End-user financing can be obtained from several end- users. The foreign market may be another possibility to acquire end-user financing. However, foreign entities may also be willing to buy foreign rights outright.
Completion Funds Completion funds are designed to provide partial production financing or post-production financing. Usually completion funds are obtained when principal photography has been completed but the release of the film is held up because of lack of funds to pay the lab or due to lack of funds to complete post-production. Since the participation of the financier providing completion funds is key, often he has to be paid a larger percentage.
Gap/Supergap financing Gap/Supergap financing is a form of mezzanine debt financing where the producer completes their film finance package with a loan secured against the film's unsold territories and rights.mezzanine debt Gap (or supergap) loans are subordinate to the senior/bank production loan, but in turn, the gap/supergap loan will be senior to equity financiers. A gap loan becomes a supergap loan when it extends beyond 10-15% of the production loan required to shoot the film; usually a bank is unwilling to bear the risk beyond 15% of the budget. Gap/Supergap lending is a very risky form of capital investment and accordingly the fees and interest charged reflect that level of risk.
Investor Financing Often a single wealthy investor or a group of investors may be willing to finance a film. This may happen at the development, pre-production or production stage. For example, in recent years, hedge funds have been interested in financing picture deals. Often such a deal might be in the context of a limited partnership, where the limited partner is not liable for budget overruns and only risks the capital invested. Often limited partners are interested because of the tax advantages. Expenses may be immediately deductible for tax purposes, while taxes on profits may only have to be paid in the distant future – this would be a way of maximizing the value of tax deductions. This is comparable to a firm with high taxable profits acquiring another firm with tax-loss carry-forwards.
Tax-Shelter Deals A number of counties have introduced legislation that has the effect of generating enhanced tax deductions for producers or owners of films. Schemes are created which effectively sell the enhanced tax deductions to wealthy individuals with large tax liabilities. The individuals pay the producer a fee in order to obtain the tax deductions. The individual will often become the legal owner of the film or certain rights relating to the film, but the producer will in substance continue as the real owner of the economic rights to exploit the film. For example, German tax-law used to allow investors to take an instant tax deduction even on non-German productions and even if the film has not yet gone into production. The film producers can sell the copyright to one of these tax shelters for the cost of the film's budget, then have them lease it back for a price around 90 % of the original cost.
Co-financing Co-financing partners share production and distribution costs and agree to split future revenues. When Fox decided to make the movie Titanic, it asked Paramount to put up $65 million to help finance the film in exchange for a portion of profits and movie rights. Co-financing can be for one or several movies. Studios tend to co-finance if they are financially constrained. Riskier movies tend to be co-financed, while less risky pictures are financed in-house. Films tend to be co-financed if they are much riskier than the usual films that the studio finances.
Co-financing When different films have to compete for scarce in- house resources, riskier films often tend to get side- lined. Nobody wants to take them on because they have a higher probability of being abandoned And if they do get abandoned, the individuals involved bear a disproportionate amount of the cost, since they dont get credit for the time spent on the abandoned movie. Hence, otherwise desirable movies dont get made because of the human capital considerations involved. Using co-financing in such cases ensures that enough financing is provided because the studio as a whole commits funding to the project – no one major has to bear the costs of failure.
Problems with Outside Equity A big problem with outside equity – normally – is information asymmetry. In the film industry, the problem is less information asymmetry than lack of any information – its very difficult to forecast film revenues. The bigger problem with equity is the expectation of artistic control. Hence producers are always looking for investors how want to have exposure to a new source of risk or to be associated with a creative venture – without artistic control.
Problems with Outside Equity The availability of outside equity also means that studios may not be able to insist on artistic control if they want to participate. Consequently, studio compensation may be more fee-based, rather than equity. Actors themselves are also investing in the equity of a film, these days.
Lender Financing and Outright Sales In addition to obtaining equity financing, it is also possible to finance pre-production and production by selling part of the rights to distribution or to other revenue streams. Commitments to purchase such rights in the future can also be used as the basis for bank and other lender financing.
Negative Pickup Deal A negative pickup deal is a contract entered into by an independent producer and a movie studio wherein the studio agrees to purchase the movie from the producer at a given date and for a fixed sum.negative pickup deal Until then, the financing is up to the producer, who must pay any additional costs if the film goes over-budget. Superman and Never Say Never Again are examples of negative pickups. SupermanNever Say Never Again However, once a negative pickup deal is signed, it is easier to obtain financing for the production, since there is already a buyer for the film. E.g., the pickup letter can be used as collateral for borrowing from a bank. If there is no prior deal, but the film is offered to a distributor after being produced, its called an acquisition.
Negative Pickup Deal Since the buyer has already committed to purchasing the film in a negative pickup deal, the producer has a free hand, subject only to satisfying his investors. This may result in the producer reducing the riskiness of the film and the quality of the end-product as well. For example, in Terry Gilliam's Brazil, the producer, Arnon Milchan, had a negative pickup from Universal Pictures. The studio had creative disagreements with the director over choice of star, content and duration, and failed to resolve these issues to its satisfaction, because the negative pickup had essentially granted Milchan final cut.Terry Gilliam'sBrazilArnon MilchanUniversal Picturesfinal cut The studios and distributors will contain this risk by offering the negative pickup contract only to a production that has financiers, a script, and key creative personnel, particularly the director and stars.directorstars
Presale Financing Deals This is the funding of a films production costs through the granting of a license for the films rights by a producer to a distributor in a particular media or territory before the completion of a film. Presales can take the form of funds, guarantees, or commitments. Even if the presale does not provide immediate funds, it can be used as collateral for a loan, similar to the negative pickup deal.
Completion Guarantee Banks and other investors are interested in ensuring that the film is completed – without a completed film, there is little chance of their recouping any of their investment. Furthermore, given the nature of pay-or-play contracts, if a film is stopped midway, it may require a large investment for it to be resumed. A completion guarantor is a company that agrees either to advance all sums required to complete payment of a production cost of a picture if that cost exceeds the budget, or to repay the sums a financier has loaned or invested. The completion guarantor charges a fee that could be up to 6% of the films budget.
Completion Guarantee A completion guarantor itself needs financial backing. This is obtained by the insuring of the completion guarantee. Financiers usually dont have expertise in how a film is made and what aspects of the film production are likely to delay the completion of the film or to cause it to exceed its budget. Completion guarantors are knowledgeable in this respect and thus add value. The guarantor inspects the budget, script and the shooting schedule to ensure that the film is feasible.
Completion Guarantee The guarantor ensures that finance equal to the approved budget for the film is available all personnel - artistic and technical - are available for, and indeed capable of, the making and completion of the film that insurance, studio and location arrangements are satisfactory that the documents to the acquisition of the basic story and/or novel, the screenplay and the music in order to be sure that the production company is entitled to make the film. that service agreements with the director and artists do not grant rights which would seriously endanger the delivery of the film The guarantor closely monitors the shooting of the film and receives daily shooting progress reports and regular cost reports. It also monitors the post-production schedule until the film is actually delivered to the distributor.