Discussions with Financial Institutions
THE PRODUCTION SECTOR• film production is a prototype business
• film banking is inherently linked to production levels, as projects represent the (potential) market for film banking services
• bank loans—whether for interim finance or working capital—are very difficult to access for small and many established production companies
• it is difficult for production companies to retain the IP rights of the films that they produce (assets) because these rights are typically licensed or mortgaged in order to finance the film
• film production—along with film banking and film sales—are primarily project- and fee-based businesses rather than company-based businesses
• many financial institutions have suggested that most European film producers do not fully understand the film business, specifically the sales and distribution side of the business and how that intersects with the banking industry
THE MARKET FOR FILM BANKING
• there are “big ticket” corporate banks as well as boutique banks and specialized lending institutions (subsidiaries of banks, guarantee funds, etc.) all involved in film banking
• this sector is classed as “high risk” by most financial institutions
• additionally, the market size for film banking services is limited by production output and budget levels
• the back-office cost of film lending does not justify the return for many of the players
• productions budgeted at €1.2m start to become interesting for some financial institutions, but not the majority of them
• therefore, film industry expertise within financial institutions is rare making film banking a niche business
THE CURRENT STATE OF FILM BANKING SERVICES
• banks and subsidiaries of banks provide loans not equity capital; they take ”no risk,” charge interest as well as a fee for their services, and expect full repayment within a specific period of time
• additionally, liquidity in the current economic climate is low with many financial institutions still present in the market but not actively lending
• in terms of interim financing loans, the current economic crisis has made valuing sales agent and distributor contracts very risky
• tax-based lending—while the most common film banking service—is complicated by gearing schemes and the “interpretability” of each country’s ever-changing tax laws
• gap financing is currently only on offer from a handful of banks mostly in Germany
• working capital loans for small and most established production companies are not available unless those companies have assets
• a few French and German financial institutions do provide development loans to small and established production companies, but the loan amounts are low
• while interest rates have been lowered, financial institutions are primarily seeking to leverage that to increase their own profit margins rather than to lend to
producers at a lower rate
THE POTENTIAL FOR SYNDICATION
• cross-border collaboration between financial institutions (i.e. syndication) is usually not profitable for the institutions when lending to small and most established production companies
• many banks would rather not lend, then lend in syndication and split their fees with another institution
• additionally, financial institutions in one country typically do not lend to production companies based in another country primarily because of the lack of a cross- border legal framework for institutions to access and evaluate the financial track records of foreign production companies
• the European Investment Bank (EIB) is essentially a corporate bank—it can only issue direct loans for €25m or more; however, it has a mandate to support SMEs, which means it requires syndication partners in order to offer film banking
services
• furthermore, in the past, the potential for the European Investment Bank to syndicate with a national bank to lend to SMEs has been hindered as most of the potential partners did not want to split their fees and would rather have turned down a loan application than share the transaction with EIB. However, in the current climate, this syndication opportunity with EIB might be more attractive to specialized lending institutions.
• however, cross-border lending to European production companies has occurred using the IFCIC loan guarantee
THE POTENTIAL IN LEVERAGING LOAN GUARANTEES
• while syndication may not offer a solution to the lack of bank credit for production companies, loan guarantees might
• this study analyzed three 3rd-party guarantee mechanisms in Europe: Audiovisual
SGR in Spain, the Landesbürgschaften in Germany, and IFCIC in France
• in operatation for three years, Audiovisual SGR has provided guarantees for a range of film projects but their guarantees are presently capped at €600K and they are currently focused on the Spanish production sector
• while there are benefits to using the Landesbürgschaft guarantee in Germany, many cited this mechanism as being overly bureaucratic and unwieldy
• the French guarantor IFCIC has the longest track record in terms of providing guarantees and—since 2006—they have guaranteed loans for non-French, European co-productions through French financial institutions such as Coficiné, Cofiloisirs, and Fortis Mediacom Finance
• additionally, IFCIC has the potential to guarantee loans provided by non-French financial institutions
• one objection raised by non-French banks about the IFCIC guarantee is that it splits any losses pari passu with the lending bank: it is a risk-sharing mechanism rather than a 100% guarantee
• however, 3rd-party guarantees such as those provided by Audiovisual SGR, the
Landesbürgschaften, and IFCIC do increase the access to loans on a project-by- project basis for production companies
2
Recommendations
2.1
Introduction
The following recommendations are aimed at addressing some of the major challenges that small and established film production companies in Europe are faced with in terms of accessing bank credit.
Bank credit is instrumental for independent producers since most pieces of the financing of a film (pre-sales, minimum guarantees, subsidies, tax incentives, private equity, etc.) are paid out in installments over the course of the production. This leaves producers with no other alternative than to cashflow these financing agreements through a financial institution in order to pay the production costs.