Hailey Johnson
Film production is a high-risk venture that requires a large upfront investment. Financing a new film is a risky investment, even for blockbuster titles that do not always break even and recover costs. Banks and other financing entities provide external financing in the form of loans to producers. These loans are often secured against the film's unsold territories and rights, and banks will closely examine the collateral as this type of lending is a very risky form of investment. Banks prefer calculated risks with known payouts and use proprietary risk mitigation regression analysis to assess if future film revenues can meet expectations.
| Characteristics | Values |
|---|---|
| Film financing | Commercial banks with specialised film finance branches provide external financing in the form of loans to producers. |
| Types of film financing | Co-production, loan syndication, risk indemnification, and insurance |
| Debt financing, project financing, corporate financing, gap/supergap financing | |
| Bridge financing | |
| Deficit financing | |
| Film completion bonds | |
| Pre-sales | |
| Soft money tax credits | |
| Intellectual property rights as collateral | |
| Negative pickup contract as collateral | |
| Gap/supergap financing as mezzanine debt | |
| Risk mitigation regression analysis |
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What You'll Learn
- Banks prefer calculated risks with known payouts
- Gap/supergap financing is a risky form of investment for banks
- Co-production, loan syndication, risk indemnification, and insurance help mitigate risk
- Film completion bonds guarantee the loan gets paid back, reducing risk
- Banks examine collateral for gap/supergap loans due to high risk
Banks prefer calculated risks with known payouts
Film production is a high-risk venture that requires a large upfront investment. Financing a new film is a risky investment, even for blockbuster titles that do not always break even and recover all costs. The film industry has been facing drastic changes, including a steep increase in average production costs.
Banks, on the other hand, prefer to make money with a set interest rate on the fixed amount they lend. Once they are paid back with interest, they are out of the equation, and the filmmakers maintain a larger amount of equity in the project. Banks do not want to be in the filmmaking business; they prefer calculated risks with known payouts.
To obtain funding from a bank, filmmakers can provide various forms of collateral for a loan on their project. For example, they can sell distribution rights to foreign territories before production, known as "pre-sales." These pre-sales may only yield a modest deposit and a promissory note to pay the rest upon completion of the film. Alternatively, a producer will have a bank lend against the value of the negative pickup contract, commonly known as "factoring paper." In this case, the bank takes on a basic origination/setup fee.
Another option for filmmakers is to obtain a gap/supergap loan, a form of mezzanine debt financing where the producer completes the film finance package by procuring a loan secured against the film's unsold territories and rights. Most gap financiers will only lend against the value of unsold foreign (non-North American) rights, as domestic rights are seen as a "performance" risk. Banks will carefully examine the collateral for the film because this type of lending is a very risky form of capital investment, and the fees and interest charged reflect that level of risk.
To mitigate risk, filmmakers can also purchase a film completion bond, similar to an insurance policy, which guarantees that the loan will be paid back. This option may be preferable to banks as it transfers the risk away from them.
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Gap/supergap financing is a risky form of investment for banks
Film production is a high-risk venture that requires a large upfront investment. Financing a new film is a risky investment, even for blockbuster titles that do not always break even and recover all costs. In the motion picture industry, gap/supergap financing is a form of mezzanine debt financing. This is when a producer wishes to complete their film finance package by taking out a loan that is secured against the film's unsold territories and rights.
Most gap financiers will only lend against the value of unsold foreign (non-North American) rights, as domestic (North American: USA & Canadian) rights are seen as a "performance" risk, as opposed to the more quantifiable risk of the foreign market. The foreign value of a film can be ascertained by a foreign sales company/agent by evaluating the blended value of the script, genre, cast, director, producer, and whether it has theatrical distribution in the US from a major film studio. All of this is taken into consideration and applied against the historical and current market tastes, trends, and needs of each foreign territory or country.
Banks like JP Morgan have an entertainment division that uses proprietary risk mitigation regression analysis to see if future film revenues can meet exceedance probability (where ultimate revenues allow the loan to break even). However, this is calculated guesswork, and it has caused all of the major national banks to lose millions in bad loans. An alternative to such loss protection is fully insured media funds, which are now being carefully reviewed by risk analysts at major hedge funds, banks, and institutional pension plans specializing in investor risk mitigation.
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Co-production, loan syndication, risk indemnification, and insurance help mitigate risk
Film production is a high-risk venture that requires a large upfront investment. Co-production, loan syndication, risk indemnification, and insurance are important strategies that stakeholders in the film industry employ to share and transfer risk.
Co-production
Co-production is a joint venture between two or more production companies that allows producers to share production and marketing costs. For example, unofficial co-productions occur when two creators from different countries with no official treaty want to work together. In the United States, where there are no co-production treaties with other countries, producers can use a Production Service Agreement (PSA) to create a joint venture.
Loan syndication
Loan syndication involves multiple financiers pooling their capital to finance larger loans. This strategy helps to distribute the financial risk among several parties.
Risk indemnification
Risk indemnification is a way for stakeholders to transfer risk. Negative pick-up deals, for instance, transfer the risk of production to the producer, while distributors accept the risks associated with the commercial exploitation of the film.
Insurance
Film production insurance is essential to protect against unexpected events that could lead to significant financial losses. It covers injuries on set, equipment damage, copyright claims, and any vehicles used during production. Specialized policies can be added for specific production needs, such as underwater shoots or high-risk stunts. Insurance companies or completion guarantors may also insure or guarantee some risk-related aspects of film production in exchange for a fee.
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Film completion bonds guarantee the loan gets paid back, reducing risk
Film production is a high-risk venture that requires a large upfront investment. Even blockbuster titles do not always break even and recover all costs. The US film industry uses various strategies to mitigate financial risk, including co-production, loan syndication, risk indemnification, and insurance.
Film completion bonds are a crucial part of this risk mitigation process. A completion bond is an insurance policy that guarantees that a film will be completed and delivered on time and within budget. It transfers the risk from the production company and investors to a film bond company, which acts as a guarantor. If the film goes over budget, the completion bond company will provide additional funds to ensure completion. In the event of unforeseen circumstances that prevent the film from being completed, the bond company will take over production or compensate the investors.
Completion bonds are particularly important for independent films, which often have limited tangible assets to offer as collateral. By obtaining a completion bond, producers can secure financing from lenders and distributors who require assurances that the film will be delivered as promised. The bond company reviews and approves key aspects of the project, including the script, budget, schedule, crew, cast, and financial package, before agreeing to insure the movie.
The use of completion bonds benefits both the producers and the lenders. Producers can access the necessary funding to turn their creative vision into a reality, while lenders can offset their liability and protect their investment. In the event that the film exceeds its budget, the bond company may provide additional funds beyond the contingency budget, ensuring the project's completion.
Overall, film completion bonds play a vital role in reducing the financial risk associated with film production. By guaranteeing the timely and on-budget delivery of a film, completion bonds provide assurance to all parties involved and facilitate the complex process of film financing.
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Banks examine collateral for gap/supergap loans due to high risk
Film production is a high-risk venture that requires a large upfront investment. Financing a new film is a high-risk investment, even for blockbuster titles that do not always break even. This has led to the rise of gap and supergap loans, which are used to cover the missing chunk of a film's budget. These loans are provided by banks and other investors.
Gap loans are a type of financing that allows borrowers to cover immediate expenses. They are typically used by investors who want to purchase a property but do not have the finances for the full amount of the down payment. In the context of film financing, gap loans are provided by banks to cover the shortfall in a film's budget after other sources of funding, such as equity, tax breaks and presales, have been accounted for.
Supergap financing is similar to gap financing but is considered a riskier position than bank gap loans. It is used when the gap in funding is larger than what a regular bank will provide. Supergap investors include companies such as Grosvenor Park Media and New Bridge Film Capital, which lend to productions with the support of reliable sales agents.
Due to the high risk associated with gap and supergap loans, banks and other lenders require collateral to secure the loan. In the case of film financing, collateral can take the form of intellectual property rights or unsold rights to future sales in various territories. These intangible assets are crucial in film financing deals, especially for independent producers with few tangible assets.
To mitigate the risk of gap loans in real estate, lenders may require borrowers to put up assets such as property deeds, vehicles, or stocks and bonds as collateral. A good credit score is also necessary to qualify for a gap loan. Additionally, gap loans can affect the borrower's reputation, as they may be seen as a sign of financial desperation.
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Frequently asked questions
Banks generally do not like to take on performance risk and prefer calculated risks with known payouts.
Performance risk is when a bank lends against the value of a film's domestic (North American) rights.
A gap/supergap loan is a form of performance risk loan. It is a type of mezzanine debt financing where the producer borrows against the film's unsold territories and rights.
Gap/supergap loans are a very risky form of capital investment with high fees and interest rates. They are considered risky because they are subordinate to senior/bank production loans and are only senior to equity financing.
Banks can mitigate performance risk by closely examining the collateral for the film and requiring a film completion bond that guarantees the loan gets paid back.
