Union Patriot Capital

Brave New Deals

Aug. 05, 1997

Brave New Deals/When it comes to funding indie films,
more bankers are filling in the gaps.

by Josh Chetwynd

Independent producers looking for ways to bankroll their projects are facing the most bullish banking atmosphere since the late 1980s. Only a few years ago, banks would rarely cover financing gaps greater than 10% of a film's budget. Today, financial institutions -- attracted by burgeoning markets, the higher interest rates and hefty up-front fees banks receive for these deals -- are covering 50% or more.

"The bank market has become so interested in the entertainment industry," says John Miller, managing director of Chase Manhattan Bank's entertainment unit, "[that] the competition in our arena is as great as it was in the 1980s (with the video boom) when banks couldn't finance enough projects."

Banks engage in gap (or bridge) financing based on the prospective value of unsold foreign territories. Those markets are then used as collateral to cover bank loans. Depending on which territories are unsold, banks may be willing to cover larger and larger gaps. For example, lucrative markets such as Japan or Germany can yield big loans.

The surge in this form of financing can be attributed to the growing interest of the foreign market in English-language product to fill the multiplex -- as well as the television -- pipeline.

"Ten years ago, 50% of a film's budget could be recouped from domestic theatrical. Now that number is 30%," says Mary Yoel, senior vp and assistant manager of City National Bank's entertainment department, which recently helped finance Johnny Depp's "The Brave." "I think the foreign markets have gotten more sophisticated and filled the lost percentage (in domestic sales)." (Because the amount that can be recouped from foreign markets remains limited, it's still rare for a bank to bankroll large gaps for films with budgets greater than $20 million.)

Good Machine, a 6-year-old independent-production company that finances some of its own projects, is an example of a company besieged by bankers interested in getting in on the action. When the company recently announced that it would be gap financing two or three of its projects, Good Machine was forced to hire somebody just to field the requests from banks offering to cover the costs. "The amount of people who were approaching us was amazing," says David Linde, Good Machine's president of worldwide sales.

Chase Manhattan's Miller, whose company is the film sector's biggest banker with a loan portfolio in excess of $1 billion, estimates that there are between five and eight banks that originate transactions with producers but another 30 to 40 that become secondary lenders, buying portions of the loan.

In recent years, banks who have upped their involvement or entered the independent-film lending market include Chase Manhattan Bank (Chase Securities), Comerica Bank-California, Republic Bank of California, Silicon Valley Bank, Banque Paribas, Imperial Bank and City National Bank.

Although the environment is mostly rosy, bankers warn that producers who have not established a majority of their project's components by the time they're seeking funding might be disappointed by how little help they may receive from lenders.

"Organization and preparation are key," says Michael Mendelsohn, who, through his company, Union Patriot Capital, is the group portfolio manager for Banque Paribas. "A script alone doesn't do it. A producer must try to put many elements of the package in place -- like actors, a director, a budget and an indication (their production) has been perused by bonding companies."

Filmmakers who are able to get their talent to defer payment until the bank lender is paid off will also have a better shot at a loan.

First-time producers or small production houses should also be aware that the largest percentage gaps generally go to those who are looking to cover a series of projects.

Because foreign markets can only yield so much, there is a limit to the number of films bankers can finance. Miller believes that the days of bankers covering 60% or 70% gaps are limited. "There are a lot of banks that are chasing unwise deals," he says. "I think there will be a correction in the market within the next three years."