Global banks face the new reality of independent commerce

Just as George Banks, the bowler-hatted boss of Mary Poppins sang nearly 60 years ago, bankers demand “precision” when they go to work. Without “order”, there is a danger of “chaos and moral disintegration…and a terrible waste”. Well sung, given that the world today faces an existential “mess” as media and entertainment bankers head to the 75th Cannes Film Festival.

The past 15 years have already thrown their own outsized curveballs at bankers and second-tier financiers, including the financial crisis of 2008-09, when the Masters of the Universe suffered a Marvel-wide crisis. – leading to a plethora of bank media and entertainment lending books being closed – and giving rise to a slew of second-tier finance deals. Fast forward to March 2020, even before the COVID-19 pandemic shook the world, and the lending industry saw a series of key players leave the independent industry. Bank Leumi, First Republic, Pacific Mercantile and Bank Hapoalim all closed, after earlier losses such as Royal Bank of Scotland, Standard Chartered and Allied Irish. And when Opus was acquired by Pacific Premier Bancorp in the spring of 2022, the entertainment division was shut down.

As COVID began to take its toll in 2020 and 2021, engaged industry lenders, including City National Bank and Banc of California, initially remained very quiet on their own account as the risk of COVID production shutdown, question marks over insurance and bonds and a largely disrupted box office market hammered the sector. Pricing and risk management, the daily bread of all banking divisions, has become a minefield given the general market collapse.

“We were on the sidelines until the fourth quarter of 2021,” says David Acosta, who has led City National’s television and film finance group for more than a decade.

“Now we’re taking a few different, more holistic approaches when looking at project funding, and looking for more contingencies to put aside given the risks. Frankly, it’s not pretty for independents. What has always been a tough market is probably seeing a 30-40% drop in capacity right now because the economy doesn’t make sense.

For example, Acosta pointed out that COVID insurance and paying extra PPE costs alone can dump “an extra $1 million to $1.2 million in costs on a $10 million movie.” And as every banker and financier has pointed out for this report, COVID-19 isn’t exactly “over” yet.

Acosta’s peers agree: “It’s entirely accurate to say that COVID-19 has accelerated trends that were already underway,” says Banc of California’s Adrian Ward. “There remains minimal value in the no-name, low-budget indie films that were flooding the market, so we focused on the mid-size indie market over $5 million where we can help. And once the protocols and government programs have been established, we have made ourselves comfortable funding TV and film without bond or COVID insurance based on producer and filming experience and the specific circumstances of the project.

As a result, over the past year, BOC has been “extremely busy. Some [completion] obligation [companies] such as media guarantors were smart, offering a mixed COVID and bond policy, and the costs gradually dropped from around 15% to 20% to something much more palatable. That said, buyers around the world are working on a backlog of unreleased theatrical content throughout 2022, and some distributors are chasing discounts, which isn’t so easy.

The European banking and financial landscape, beyond Coutts’ long-standing and experienced animation team, who have worked closely with all streamers and especially Netflix, is uneven. Like Intl. Film Partners’ Bernie Stampfer, a former head of Deutsche Bank’s media division, points out that lenders outside of France and Germany are rare and almost non-existent in financing film and television on the continent.

“More and more producers are talking about the French lenders Cofiloisirs and Coficine. They have become very important for co-production and funding across the continent. Commerzbank and DZ [Bank] focus a lot on the national market, but also get involved in European co-productions and international projects if they have a German partner.

And default insurance backed by European institutes and public bodies has been a big help, he says, although it’s normally capped at €500,000 ($532,000) per project.

As a senior debt lender, DZ Bank dropped no financial bullets during the 2008-09 financial crisis, but DZ media and entertainment chief Andre Druskeit points out that the market sell-off meant that “we have lost a lot of potential union”. industry partners. Unlike the United States, where it is a larger market of debt providers, it has become much more difficult to find specialist partners to share agreements with. »

Further down the line, COVID “has radically changed the type of projects we see: we’ve seen virtually no cinema projects in the past two years and we would have been celebrating if we had found a cinema film 100 % guaranteed to be financed during this period.”

While streaming has fueled production pipelines in 2020-21, DZ needs a German-speaking element in play such as a lead producer, co-producer or major local funding source to get involved.
“I wouldn’t fund an all-Spanish deal with involved partners that we don’t know, for example,” says Druskeit. “Banking is always about people, or it should be. You like to know the people you deal with.

A powerhouse on the continent when it comes to complex independent partnerships, with over 160 different projects funded in 2021, Cofiloisirs has become a go-to lender even among UK and Irish producers working on difficult cross-border film and TV projects.

Chief executive Jean-Baptiste Souchier says his operation has put expertise first and the customer mix has changed.

“There are more projects with multiple producers and funding sources — and platforms come with their own challenges — all of which require careful structuring. We recently handled an Apple TV-Newen [a production shingle owned by French broadcast giant TF1] deal, where one would wonder why a group like TF1 would need a financial third party given its size and financial means. What Newen wanted was a dedicated partner to fund the Apple arrangement. Our understanding of how these deals can work in the loop helps the producer benefit from a much more efficient cash flow structure. »

Souchier, whose stated goal is to seek alignment of interests wherever possible on transactions, says keeping the bank closer to all aspects of the financing and structure of a production works in favor of the producer.

“Very often we structure a deal with that specifically in mind. However, the gap [lending against unsold territories] is an equity risk and we are a bank, not an equity player. But we are as flexible as possible, perhaps offering higher values ​​against receivables, and sometimes we are able to work with producers or partners who are able to take that risk on their own.

Meanwhile, Head Gear, the most active second-tier lender in the international independent market, is stepping up and moving into traditional transaction banking territory. Marche Cannes films supported by the financier include Bankside’s ‘Talk to Me’, ‘Flux Gourmet’, ‘The Accursed’, ‘Girl at the Window’ and Mister Smith’s ‘He Went That Way’.

Head Gear recently named Daniel Negret, formerly of Ingenious Media, as head of the financier and will manage $50 million earmarked for more vanilla-style loans in addition to the more aggressive Head Gear pot – totaling around $100 million in total. .

“We aim to challenge bank rates and offer lower transaction costs with highly competitive blended rates,” said Head Gear Founder and CEO Phil Hunt. “We are quite willing to partner with others when it comes to larger syndicated deals, but we don’t want to stray too far from the ultimate borrower or we don’t have enough say in the matter. say about how the deal is done.”

And just when tax credits and government rebates would normally have reassured banks seeking to prop up and sustain independent producers, systemic economic risk has tripled across a range of popular filming territories.

“I’m not very comfortable with the South African Department of Trade and Industry system at the moment,” Hunt says, and he doesn’t touch Puerto Rico either. “While the United States have a range of state offers, you really need to know them thoroughly. The United Kingdom and Serbia, on the other hand, are very good and I’m watching Malta at the moment.

“Having said that, we are very pragmatic, we are very used to handling complicated multinational transactions and we collect many different local tax credits.”

Angus Finney’s book is “The International Film Business: A Market Guide Beyond Hollywood”
(3rd edition).