Post by filmlaw on Jan 29, 2021 0:33:56 GMT 4
Hello All, as a new member I've poked around the various threads enough to appreciate that there are some very knowledgeable and sophisticated people on this board and some great links to truly global information posted as well as discussions to peruse or participate in. In another part of the Sapphire forest, following an illuminating discussion, I was invited to put up this thread to run through film financing aspects I've been involved with as a consultant to film producers, work that I've been doing "hanging out my own shingle" for 23 years now.
My career began working with a large law firm in the banking group, involved with plain vanilla lending, syndicated lending and structured finance, acting for the lender in all instances. I mention this because it was good training for a move into entertainment finance which is for the most part project finance except involving intellectual property rather than, for instance, real estate as the underlying asset which is available to be secured.
BRIEF BACKGROUND
Traditionally, studio financed films or television shows were bankrolled from development (scripting) through production to marketing and "P&A" (prints and ad expenditures) by one entity which recovered its costs from a share of box office and ancillaries (video and television sales) in the case of films or ad revenue from an affiliated entity in the case of television. In those days, studio films had a range of budgets with "tentpole" being just a small share of the overall output. "Independent" films were developed on a producer's dime, or from a producer's budget if they had an output deal with the studio which gave the studio the first right to produce the film. But over time, independent films were developed and produced independently (away from the studio system), but they might still be purchased by a studio and given a "wide release" theatrically through a "negative pickup" type deal. Studios got a taste for laying off production costs in this way and picking and choosing projects to lay off risk.
Producers would work with financiers to fund their production budgets. These might be a one-off investor, but more sustainably it would be mavericks in Europe like Cecchi Gori or de Laurentiis who had their own studios in Rome, or specialist broadcast or distribution companies such as Canal+ with the backing of state conglomerates, or tax wizards in Canada who created beneficial structures for punters to accelerate losses for tax purposes through participation in film investment vehicles. (There is the truly brilliant story, worthy of a thread on its own, of Mel Gibson's vanity project, The Passion of the Christ, how no studio would back it, no studio would release it, and yet it made back its budget and more so when he bankrolled its self-release. There was even an early machine learning algorithm involved which predicted the outcome!)
But in some cases producers weren't just given a bag of cash (or dipped into their own) to get the film made. They were given promises of cash in the form of pre-sale contracts which they then needed to bank. A successful Canadian producer from this time told me stories of flying around Europe stitching together the financing for his next film as he carried the enormous canisters containing the inter-positive of his last film to sell to distributors (who would strike an inter-negative from the inter-pos for their own territory as they took the pitch meeting on the new project). He promised to be back in a year's time with the next film for which they put down a deposit with the promise to pay the balance on delivery. His trips were financed as an export development cost by the government!
The availability of bank financing for this type of production coincided with a final set of changes to the tax rules in Canada that put a stake through the heart of the tax driven investment schemes. (Breakdown by Norman Bacal is a tempting read if you are interested in his involvement in these tax vehicles during his tenure at the law firm Heenan Blaikie, although it's not very detailed on this aspect, focusing more on the structure of the firm, sketches of the characters/egos involved and how it imploded). Industry lobbying meant that production incentives supported by the public purse would survive though: tax credits for labour spend at both the federal and provincial level were created. Soon just about every province was competing with the others for the rebate amount they were prepared to give to producers. And this had a direct impact on lobbying by US film producers and talent unions for States to create tax incentives to "keep productions at home". US film and tv producers have thus had to catch up to Canadian and European producers who were already familiar with complicated financings.
FILM FINANCING TODAY
So all of this is by way of a brief but necessary background to understand that today a film or TV project is financed by a blend of broadcast pre-sales, distribution pre-sales, state sponsored grants (license fee top-ups for instance) and equity and assistance in the form of tax credits. Sometimes there is a place for investor equity. Often these financial plans are still insufficient for the budget required. Additional funding can be sought from "foreign" broadcasters and state entities which are incentivized to acquire "local"/"national" productions. Thus the rise of "official treaty co-productions" which for projects financed under their rules, can garner bonus amounts not otherwise available to what would otherwise be considered a "foreign" production. So a film can be both "Canadian" and "German" at the same time. When these films are done well, this stitching together can be seamless, but too often the project has tell-tale signs that it was made by committee, and there are many "Euro-pudding" films in the marketplace.
The work I do can range from the negotiation on behalf of a producer of performance (star) contracts with agents or managers or legal teams for the biggest Hollywood actors, to negotiation of broadcast or distribution agreements, to ensuring that there is a compliance regime in place for the production so that the correct contracts and documents are in place for key crew to ensure all rights necessary to exploit the production are obtained by the SPE that will hold the copyright. There are a few key boilerplate clauses that every single contract must have, whether for investors or for the company owning the consumer brand logo appearing in the background of a shot.
In addition to the foregoing, insurance policies need to be in place, CGL and Entertainment umbrella, as well as an Errors and Omissions specialist policy. The "chain of title" relating to the underlying IP needs to be airtight. A completion guarantee may be required by financiers to ensure that their investment will be protected and a production will be available for sale into the marketplace. A collection account agreement (a specialty type of lockbox arrangement) may also be required. And all of the foregoing paper needs to meet the approval of the bank's counsel. Because in the end the production's cashflow requirements need to be accurately projected so as to be in step with the drawdowns from the loan account. And this matters because the loan will also specify an interest reserve component which covers the life of the loan, typically 18-24 months from first drawdown.
CONSULTANTS VS LAWYERS
Lawyers are most comfortable dealing with lawyers of course and each participant along this trail usually has their own in-house counsel with the exception of the producer, unless they have sufficient deal-flow. The producer is often best served by a lawyer who is not too head-strong and understands that their role is more like that of an orchestra conductor ensuring everyone plays their role and reaches the conclusion together. To extend the metaphor a little further, a producer's counsel who allows the bank's counsel to play the role of concertmaster is in the best position to permit the producer to focus on the relationships with key creatives and key stakeholders. In my experience knowledge of the law and negotiation technique is important but also truly understanding what each stakeholder needs (and being able to know how to deliver it) is critical to success. For instance, the producer's bank's account manager is much more at ease when they know that their interest reserve calculation matches with the production's overall cashflow and marrying the production's expenditure cashflow with the overall cashflow (in and out flow) is beyond the scope of the production's accountant. This is the reason I am more often describing my role as a finance consultant than a lawyer!
BANK SECURITY
Bank security (in a true belt and suspenders approach) usually involves a mix of fixed and floating charges in the old parlance, typically a copyright mortgage, corporate guarantee from a parent company supported by a general security agreement and assignments of revenues from tax authorities and acknowledgments of security interests and directions of payment from broadcaster/distributor license holders. Frequently in co-productions there is more than one lender and so an inter-creditor agreement needs to be in place and the <ahem> appendage swinging by the banks' counsel needs to be monitored and called out as not being constructive to the needs of the banks' customers. For a while in the late 90s and early 2000s, there were some insurance products which permitted banks to take a much more risky component to their loan exposure in the form of what was known as "gap finance" which was in effect equity type exposure without the backend participation. Several banks offered this in Europe, Canada and the US. But they burned themselves badly. It is now a truly specialist product only offered by three or four financiers and only under very restrictive circumstances.
DISCIPLINE
This kind of discipline (even by banks) is very hard, but is rewarded. One of the more instructive panel sessions I have attended at industry markets and conferences involved a UHNW financier who bankrolled 10-30million $ productions on the strength of his family's real estate portfolio. But rather than just think of his involvement as purely equity, he adopted the attitude that he was a bank and required diligence on each aspect of what a bank would finance, and priced his money accordingly. So he required a thorough finance plan and would finance tax credits at a prime plus __ cost, he financed distribution agreements based on the credit risk of the counterparty (typically at a rate closer to mezzanine debt) and he would apportion no more than 20% of the budget to gap or equity. In other words he was prudent. As a result of this discipline, he lasted a dozen or so years in a business that typically blows through such investors in very short order.
None of the above really contemplates the profound changes in the marketplace over the last several years. Opportunities are still tremendous. As an example, the increased appetite for non English language productions by audiences being trained by Netflix has led a group I am working with to focus on low cost, low risk, high quality productions in Eastern Europe with a view to recouping the budget in the local market with upside from foreign. A hit is still available for a complete remake in English. In some ways what's old is new again.
BUT IS IT AN INDUSTRY?
Finally, the closest thing to an industry in the industry is children's animation. It's evergreen. And Canada is good at it, having grown Cinar, Cookie Jar and DHX/Wildbrain on the strength of good writing and government support. And funnily enough, it's the backbone that SVODs are built on. As explained here: variety.com/2021/tv/news/kids-television-streaming-netflix-apple-disney-nickelodeon-1234891622/
Very rambly. Hope it helps. Any questions?
My career began working with a large law firm in the banking group, involved with plain vanilla lending, syndicated lending and structured finance, acting for the lender in all instances. I mention this because it was good training for a move into entertainment finance which is for the most part project finance except involving intellectual property rather than, for instance, real estate as the underlying asset which is available to be secured.
BRIEF BACKGROUND
Traditionally, studio financed films or television shows were bankrolled from development (scripting) through production to marketing and "P&A" (prints and ad expenditures) by one entity which recovered its costs from a share of box office and ancillaries (video and television sales) in the case of films or ad revenue from an affiliated entity in the case of television. In those days, studio films had a range of budgets with "tentpole" being just a small share of the overall output. "Independent" films were developed on a producer's dime, or from a producer's budget if they had an output deal with the studio which gave the studio the first right to produce the film. But over time, independent films were developed and produced independently (away from the studio system), but they might still be purchased by a studio and given a "wide release" theatrically through a "negative pickup" type deal. Studios got a taste for laying off production costs in this way and picking and choosing projects to lay off risk.
Producers would work with financiers to fund their production budgets. These might be a one-off investor, but more sustainably it would be mavericks in Europe like Cecchi Gori or de Laurentiis who had their own studios in Rome, or specialist broadcast or distribution companies such as Canal+ with the backing of state conglomerates, or tax wizards in Canada who created beneficial structures for punters to accelerate losses for tax purposes through participation in film investment vehicles. (There is the truly brilliant story, worthy of a thread on its own, of Mel Gibson's vanity project, The Passion of the Christ, how no studio would back it, no studio would release it, and yet it made back its budget and more so when he bankrolled its self-release. There was even an early machine learning algorithm involved which predicted the outcome!)
But in some cases producers weren't just given a bag of cash (or dipped into their own) to get the film made. They were given promises of cash in the form of pre-sale contracts which they then needed to bank. A successful Canadian producer from this time told me stories of flying around Europe stitching together the financing for his next film as he carried the enormous canisters containing the inter-positive of his last film to sell to distributors (who would strike an inter-negative from the inter-pos for their own territory as they took the pitch meeting on the new project). He promised to be back in a year's time with the next film for which they put down a deposit with the promise to pay the balance on delivery. His trips were financed as an export development cost by the government!
The availability of bank financing for this type of production coincided with a final set of changes to the tax rules in Canada that put a stake through the heart of the tax driven investment schemes. (Breakdown by Norman Bacal is a tempting read if you are interested in his involvement in these tax vehicles during his tenure at the law firm Heenan Blaikie, although it's not very detailed on this aspect, focusing more on the structure of the firm, sketches of the characters/egos involved and how it imploded). Industry lobbying meant that production incentives supported by the public purse would survive though: tax credits for labour spend at both the federal and provincial level were created. Soon just about every province was competing with the others for the rebate amount they were prepared to give to producers. And this had a direct impact on lobbying by US film producers and talent unions for States to create tax incentives to "keep productions at home". US film and tv producers have thus had to catch up to Canadian and European producers who were already familiar with complicated financings.
FILM FINANCING TODAY
So all of this is by way of a brief but necessary background to understand that today a film or TV project is financed by a blend of broadcast pre-sales, distribution pre-sales, state sponsored grants (license fee top-ups for instance) and equity and assistance in the form of tax credits. Sometimes there is a place for investor equity. Often these financial plans are still insufficient for the budget required. Additional funding can be sought from "foreign" broadcasters and state entities which are incentivized to acquire "local"/"national" productions. Thus the rise of "official treaty co-productions" which for projects financed under their rules, can garner bonus amounts not otherwise available to what would otherwise be considered a "foreign" production. So a film can be both "Canadian" and "German" at the same time. When these films are done well, this stitching together can be seamless, but too often the project has tell-tale signs that it was made by committee, and there are many "Euro-pudding" films in the marketplace.
The work I do can range from the negotiation on behalf of a producer of performance (star) contracts with agents or managers or legal teams for the biggest Hollywood actors, to negotiation of broadcast or distribution agreements, to ensuring that there is a compliance regime in place for the production so that the correct contracts and documents are in place for key crew to ensure all rights necessary to exploit the production are obtained by the SPE that will hold the copyright. There are a few key boilerplate clauses that every single contract must have, whether for investors or for the company owning the consumer brand logo appearing in the background of a shot.
In addition to the foregoing, insurance policies need to be in place, CGL and Entertainment umbrella, as well as an Errors and Omissions specialist policy. The "chain of title" relating to the underlying IP needs to be airtight. A completion guarantee may be required by financiers to ensure that their investment will be protected and a production will be available for sale into the marketplace. A collection account agreement (a specialty type of lockbox arrangement) may also be required. And all of the foregoing paper needs to meet the approval of the bank's counsel. Because in the end the production's cashflow requirements need to be accurately projected so as to be in step with the drawdowns from the loan account. And this matters because the loan will also specify an interest reserve component which covers the life of the loan, typically 18-24 months from first drawdown.
CONSULTANTS VS LAWYERS
Lawyers are most comfortable dealing with lawyers of course and each participant along this trail usually has their own in-house counsel with the exception of the producer, unless they have sufficient deal-flow. The producer is often best served by a lawyer who is not too head-strong and understands that their role is more like that of an orchestra conductor ensuring everyone plays their role and reaches the conclusion together. To extend the metaphor a little further, a producer's counsel who allows the bank's counsel to play the role of concertmaster is in the best position to permit the producer to focus on the relationships with key creatives and key stakeholders. In my experience knowledge of the law and negotiation technique is important but also truly understanding what each stakeholder needs (and being able to know how to deliver it) is critical to success. For instance, the producer's bank's account manager is much more at ease when they know that their interest reserve calculation matches with the production's overall cashflow and marrying the production's expenditure cashflow with the overall cashflow (in and out flow) is beyond the scope of the production's accountant. This is the reason I am more often describing my role as a finance consultant than a lawyer!
BANK SECURITY
Bank security (in a true belt and suspenders approach) usually involves a mix of fixed and floating charges in the old parlance, typically a copyright mortgage, corporate guarantee from a parent company supported by a general security agreement and assignments of revenues from tax authorities and acknowledgments of security interests and directions of payment from broadcaster/distributor license holders. Frequently in co-productions there is more than one lender and so an inter-creditor agreement needs to be in place and the <ahem> appendage swinging by the banks' counsel needs to be monitored and called out as not being constructive to the needs of the banks' customers. For a while in the late 90s and early 2000s, there were some insurance products which permitted banks to take a much more risky component to their loan exposure in the form of what was known as "gap finance" which was in effect equity type exposure without the backend participation. Several banks offered this in Europe, Canada and the US. But they burned themselves badly. It is now a truly specialist product only offered by three or four financiers and only under very restrictive circumstances.
DISCIPLINE
This kind of discipline (even by banks) is very hard, but is rewarded. One of the more instructive panel sessions I have attended at industry markets and conferences involved a UHNW financier who bankrolled 10-30million $ productions on the strength of his family's real estate portfolio. But rather than just think of his involvement as purely equity, he adopted the attitude that he was a bank and required diligence on each aspect of what a bank would finance, and priced his money accordingly. So he required a thorough finance plan and would finance tax credits at a prime plus __ cost, he financed distribution agreements based on the credit risk of the counterparty (typically at a rate closer to mezzanine debt) and he would apportion no more than 20% of the budget to gap or equity. In other words he was prudent. As a result of this discipline, he lasted a dozen or so years in a business that typically blows through such investors in very short order.
None of the above really contemplates the profound changes in the marketplace over the last several years. Opportunities are still tremendous. As an example, the increased appetite for non English language productions by audiences being trained by Netflix has led a group I am working with to focus on low cost, low risk, high quality productions in Eastern Europe with a view to recouping the budget in the local market with upside from foreign. A hit is still available for a complete remake in English. In some ways what's old is new again.
BUT IS IT AN INDUSTRY?
Finally, the closest thing to an industry in the industry is children's animation. It's evergreen. And Canada is good at it, having grown Cinar, Cookie Jar and DHX/Wildbrain on the strength of good writing and government support. And funnily enough, it's the backbone that SVODs are built on. As explained here: variety.com/2021/tv/news/kids-television-streaming-netflix-apple-disney-nickelodeon-1234891622/
Very rambly. Hope it helps. Any questions?