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Author:  Michael Shyjka Manager Film Finance, Allied Irish Bank

The Roles that Banks Fulfil

Banks fulfil a number of different roles within the film industry, ranging from simply offering basic banking services as receivers and payers of funds to advising clients on financial matters to taking an element of risk in supporting film projects (although the banks themselves will never invest in individual films). Very few producers enjoy the luxury of having enough money to make their film. They will, therefore, have to raise the finance from a variety of sources and may need a bank to help to bridge any gaps between the available finance and the cost of the film or, more frequently, cash flow expenditure on the basis of money promised to the film from other sources but not yet received. Relatively few banks fully understand the risks involved in the film industry which means that relatively few banks are involved in the industry.

What Products and Services Do They Offer?

The main products offered by banks to the film industry are:

production accounts: within which all finances connected to the film are controlled, income received and expenses paid out
• collection agency: collecting revenues from the film directly from the distributors and sales agents and ensuring that everything that is owed is collected
• production loans: generally providing bridging loans to films to cover any cash flow problems during the production process
• letters of credit and guarantees: providing bank references to ensure that the producer is able to obtain credit (on reasonable terms) overseas
• slate financing: providing finance for a portfolio of films (usually a minimum of six to spread their risk)
• hedging advice: where producers are operating internationally, the bank can help producers minimise an exchange rate differences by forward buying the appropriate currency at a fixed rate. This is also true of interest rates, and it is possible to fix interest rates forward for the life of the loan
• tax-based products: eg. sale and leaseback to take advantage of fiscal incentives on offer in the UK and elsewhere
• securitisations: generating capital from an asset, eg. a film or music library, based on the potential future revenue streams from that asset

Typical Banking Transactions

Banks are involved in helping all kinds of companies involved in film production and distribution, from small companies looking to expand, through medium sized production and distribution companies looking to raise debt or equity finance, to the US majors and European multinationals looking for off-balance sheet finance to support their expansion plans. The two main types of transaction can broadly be classified as single picture financing and slate financing.

Single picture project financing: the lower limit for this type of financing is usually a budget of at least $5 million. Predominantly, finance will be advanced against pre-sales of distribution rights held by the company seeking to borrow the money. The bank will want to make sure that the credit rating of the companies giving the minimum guarantees is good and will normally discount the amount they advance to allow for any bad debts. Sales estimates currently appear to be declining in most territories, making it harder to raise money on the back of pre-sales. On single projects, banks will always insist on a completion bond being in place before they lend any money. They may be prepared to gap finance projects up to around 20% of the film's budget but will want sales estimates from reliable sales agents with good track records that show that revenues from remaining non-pre-sold territories will cover any financing gap by a margin of at least 150%. Banks will always work on the basis of trying to minimise their risk but can be exposed on single film deals if sales estimates are not achieved or if, for any reason, the completion guarantor does not pay out in full when called on to do so.

Multi-picture slate financing: is usually provided to the US majors and large multinational media companies, but would be considered for smaller companies wanting to finance a slate of films (usually a minimum of six), subject to certain criteria. These include that: the slate must have guaranteed distribution, especially in the US; the principals involved in the company must have a good track record in the industry and be able to satisfy the bank that they can deliver their business plan; and, ideally, will be contributing a significant equity stake to the venture. For this kind of deal, the bank will also look for evidence of long-term commitment from the sales agents or any distributors that have agreed to take the films - they do not want these key elements walking away from the slate if anything starts to go wrong. In assessing the credibility of the business plan, the bank will look closely at pre-sales estimates and, if appropriate, to the structure of the financing, the studios', estimates of their expected ultimate revenues from the complete first exploitation cycle of the film (which can be up to ten years from production). Although the bank does not usually take a profit position, they will expect a high position in the "waterfall" or "revenue cascade" to ensure that the principal and interest on their loans is paid before anyone starts to extract profits from the film. Typically, the bank will expect to be paid out of gross revenues net of capped distribution expenditure and fees and any gross profit participations and residuals.

Fees and charges

Fees and charges will vary widely between, and within, transactions depending upon the size of the financing requirement, the credit worthiness of the borrower and the risk being taken by the bank. Arrangement fees for setting up the facility are normally set at between 1 and 3% of the total loan. The interest rate charged is typically set at between 1 and 3% above the cost of the money to the bank (ie. 4.5% - 6.5% if the inter-bank rate is currently 3.5%) and there will also be a fee charged of around 0.5% above the inter-bank rate for funds which have been committed to the lender by the bank but not yet drawn down. Gap financing, where the risk to the bank is higher, is more expensive than loans advanced against pre-sales estimates, with a typical margin of 3 - 6% above the inter-bank rate.

Top Tips

• Banks fulfil a number of important roles within the film industry, ranging from basic banking services as receivers and payers of funds to advising clients on financial matters to taking an element of risk in helping to finance film projects.
• A major service banks offer to film makers is to lend them production finance against pre-sales of the complete film. This enables producers to cash flow production in advance of receiving any revenues from the completed film.
• Banks will help to finance single film projects and slates of films. In each case they will need assurances about the credibility of sales estimates and the agents and distributors responsible for generating revenues in each territory.
• Arrangement fees and interest rates vary considerably between and within transactions depending on the risk to the bank.