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Film Finance: The Role of Private Investors
in the European Film Market
Olivier Debande
1 Introduction: Market Limitations
The financing of film and television (TV) programmes by private investors and
commercial banks is a limited market in Europe and involves competition between
a few specialised commercial banks. Over the last years, some financial players
have even exited the audiovisual (AV) industry, a move that is considered to be the
result of the high level of perceived risk in financing film and TV programming, EU
market fragmentation and undercapitalisation of small market players.
1
As a niche
market, this industry demands experience and knowledge, and financial institutions
have limited their pan-European activities due to the difficulty of assessing the
soundness of non-national partners. In addition, this oligopolistic market structure
creates informational barriers to entry which limit the emergence of new players
ready to provide funding to European production companies.
The financing of the AV sector has features in common with the financing of
R&D, notably the need to cope with the high level of intangibles and risks
. The use of different financial instruments will depend on the stage of develop-
ment of the companies, funding needs and the risk associated with each market
segment. For instance, venture capital might be more appropriate for financing
projects addressing the development or pre-production of AV products. Further-
more, the AV sector is characterised by complex interactions among the various
players and different sources for funding. When a production company decides on a
prospective production, they have to line up financing, and different alternatives are
conceivable. If they decide entirely to self-finance the production, all the risk of the
project is borne by the producing company.
O. Debande (*)
European Investment Bank, Luxembourg, Luxembourg
e-mail: o.debande@eib.org
1
Here, the audiovisual industry also covers the film and television industries.
#Springer International Publishing AG, part of Springer Nature 2018
P.C. Murschetz et al. (eds.), Handbook of State Aid for Film, Media Business and
Innovation, https://doi.org/10.1007/978-3-319-71716-6_4
51
On the other hand, if third-party financing is mobilised, the fund provider should
be in a position to secure interests in the producing company’s assets as collateral
for the loan. These assets could have different forms including rights to the future
production, a library of films or TV programmes made or acquired by the produc-
tion company or other capital assets. In some cases, producers may have specific
distribution agreements with large distributors or be affiliated to major media
groups, broadcasters or studios. Additional ‘soft’ assets will also enter into the
assessment of the creditworthiness of the production company, such as its reputa-
tion and track record in producing films or TV programmes within the initial budget
and delivering their products on time.
The intervention of lenders in the financing of films and TV programmes is
structured on the basis of a relatively well-known model.
2
Commercial banks
require the producers to obtain presale agreements in some markets from
distributors and TV channels prior to financing the film. By selling the exhibition
or broadcast rights to the film or TV programme, for a predetermined amount of
money, producers can then get financing from the bank. The bank may then
discount the contracts, generating the liquidity for the production of the AV
work. After the film or the TV programme is made, the presale agreement can be
exercised and the rights on other secondary markets or windows sold. The loan
would then be paid out of these earnings, and, in the event that the revenues
generated by the exploitation of the rights exceeded the loan amount, the producer
would be a residual claimant. Presale agreements are a key ingredient to reducing
the risk of the loan for the lender, which could rely on the expertise of the
distributors for the assessment of the market potential of the film. The role of the
distributor is to act as a signalling device for the bank by assessing the value of the
production in their own market and evaluating the quality and the commercial
potential of the production.
A distinction has to be made with regard to the size of the production company.
In Europe, the AV market is characterised by the prevalence of small independent
production companies for which third-party financing is a critical issue. For most
producers, their primary collateral is the prospective film or TV programme itself.
Recent developments seem to demonstrate increased difficulties for small produc-
tion companies to access the debt financing market due to a set of factors: (1) their
low level of capitalisation, (2) restricted credit policy of the banks due to the legacy
of the financial crisis and the strengthening of the prudential supervision and
regulatory framework of European banks and (3) perception by the commercial
banks and private investors of the high risk attached to transactions in this sector.
In addition, the European AV landscape is affected by difficult access to the
banking sector on the part of national producers across Europe. In small countries,
few banks have adequate expertise and know-how in the audiovisual sector. But
even in the few countries with large domestic market, there is declining interest by
2
See, for instance, Davies and Wistreich (2005), Vogel (2014) and Young, Gong & Van der
Stede (2010).
52 O. Debande
the commercial banks in this sector (even for the discounting of presale contracts
with TV channels) due to the high administrative costs and a shortage of expertise.
This evolution of the European market led to the emergence of new forms of
funding such as crowdfunding. Given the heavy dependence of European producers
on TV channels as a source of production finance, the financial situation of
broadcasters—both commercial and public—has a direct impact on production
companies. Compared to the USA, there is a limited development of structured
financing instruments, such as slate financing or the securitisation of film package
in Europe. Hence, the development of European co-production schemes and the
need for producers to set up multiple sources of funding increase the complexity
and the length of time needed for a producer to close the financing arrangement for
new films or other audiovisual work.
Despite the high level of activity of the European production market, the
recovery of cinema admissions and the emergence of new distribution channels,
there has been no significant expansion of the AV private financing market. Here, it
is also important to stress the role of the regulatory and institutional framework.
Investors are affected by the lack of harmonised accounting standards used across
the AV industry, which affects their ability properly to assess the financial viability
of production companies. Another issue related to the information transparency on
the AV industry is the shortage of adequate industry databases for providing the
information particularly required for the assessment of the credit risk of the film
project.
The purpose of this chapter is to investigate the conditions for a more active role
of private investors in the external financing of the European film industry. Poten-
tial actions to attract private funds within the European audiovisual market, i.e. to
reduce and spread the investment risk in funding film or TV programme
productions, are:
(a) Support the emergence of a stronger distribution structure
(b) Development of a pan-European and/or guarantee and counter-guarantee for
financial institutions and guarantee institutions
(c) Development of an adequate database allowing for tracking of success and
failure in production and assessing the performance of production companies
(d) Improvement of the accounting standards used in the AV industry (namely, for
amortisation practices, income recognition and rights valuation)
2 Film Finance: Key Issues and Players
Financing a film requires a large investment that is irrecoverable and entails a
palpable chance of loss. The ‘nobody knows anything’ property
3
implies a high
variance of gross profits from film to film. The financing arrangement of an
3
Based on a quotation from screenwriter William Goldman (1984) ‘With all due respect, nobody
knows anything’. See Caves (2000).
Film Finance: The Role of Private Investors in the European Film Market 53
audiovisual work requires an interaction between different players. The number of
active players varies in different national markets. The independent producer
arranges the AV product financing and is in charge of bringing all parties together.
He remains owner for life of the film rights and obtains its financing through sales or
licencing of rights to distribution companies or TV channels, for a specific period
from 7 to 25 years. The following private film financers can be identified.
4
The commercial bank when considering the provision of a loan is expecting a
certain number of distribution contracts and/or presale contracts with TV
companies in order to achieve the entire budget. It will lend the funds in the form
of loans with or without recourse (depending on the financial structure, i.e. creation
of a dedicated special purpose vehicle, and on the quality of the balance sheet of the
production company). The commercial bank is taking the credit risk with regard to
the distributors and the TV channels (or could ask them to back their commitment
with a letter of credit) but is also keeping the first claim on the distribution rights of
the territory or alternatively support (video, DVD) purchased by the distributor or
the TV channels. In the case of non-payment by the producer, the bank has the
ability to sell the rights. The bank must ensure that all necessary production funds
(i.e. strike price corresponding to the amount of money, usually the same as the
budget, that the financier has to pay into the production account in order to trigger
the liability of the completion guarantor) are available in order for the insurance
given by the completion guarantor to be put in place. However, this latter condition
depends on recourse to completion bonds, which is not a common practice across
Europe.
The completion guarantor firstly confirms the film’s budget in order to issue the
insurance policy. This insurance policy gives responsibility to the insurer to cover
all budget cost overruns and to reimburse the bank in the event of the film being
called off. The completion guarantor, when reviewing the budget, checks that an
extra percentage is added to cover contingencies (around 10% of total budget cost
or more in the case of a complex production). In terms of likelihood of occurrence
of the risks, the risk of the film being called off appears to be relatively low; but on
the other hand, various risks such as bad weather conditions or defective production
equipment could occur during the production period. The completion guarantor will
cover all known risks, from political to weather risks. For the production company,
the cost of this insurance can vary from 3% to 4% of the budget. In addition, an
additional percentage (between 1 and 1.5%) could be added to the budget for
miscellaneous insurance such as errors and omissions.
The sales agent is an important player in the preparation of the financial
package. He represents the producer in all negotiations with distributors for each
territory. The sales agent knows which distributor to approach for which type of
film for a given territory as well as its financial situation and the required timing for
the film’s release. His involvement will contribute to an optimisation of the
4
Of course, public authorities active through the various existing public support mechanisms
(subsidies, loan guarantee schemes, tax-driven instruments) play another key role as well.
54 O. Debande
management of the rights associated with the films across the different release
windows. The sales agent charges a commission from 7.5% to 15% for this service,
based on the performance of the film for which he has negotiated the distribution
agreement.
The distribution company will purchase the rights for each territory where it
plans to ensure the distribution of the film or the TV series. Most of the revenue
generated by a film is received within the first 5 years of film’s life corresponding a
first cycle of exploitation of the film), and most of this is collected during the
18 months of a film’s distribution cycle. Indeed, after exhibition in its home
country, the film passes over the next several years into other channels: exhibition
abroad, video cassette/DVD, pay-TV and then free TV.
5
The ‘profit release win-
dow’ representing the life cycle of a film could be described on the basis of its
revenue potential along the different market segments, according to territoriality
(by country and linguistic zone) and time (duration of distribution rights)
agreements.
6
The sequence of this distribution life cycle differs from one country
to another and is designed to ensure a satisfactory return on each window. Films are
normally firstly distributed in the market that will generate the highest marginal
revenue in the shortest period of time. They will subsequently cascade by order of
marginal revenue contribution to markets that return successfully lower revenues
per unit of time.
Film utilisation across the profit windows
7
is becoming progressively more
important as a source of (re)financing increasingly expensive film productions,
which today can hardly be financed from the receipts generated from the cinema
alone. The relationship between the various segments still stresses the importance
of the box office success which will determine the attractiveness of films. Indeed,
under this system, the information generated in the domestic theatrical exhibition
market—in terms of box office revenues and word-of-mouth transmission of film
quality assessment—has great influence on consumer demand in the ancillary and
foreign exhibition markets. In the US market, there is clear market segmentation
5
In the pay-TV market, a distinction can be made between the first window (usually 6 months),
i.e. the first period of premium films availability on pay-TV, and then the second window (usually
also a 6-month period). After the second window, the film becomes available for free television.
Pay-TV operators’ subscribers often consider the second window as ‘second quality’, and the
pay-TV operator may be forced to reduce its subscription price to differentiate itself accordingly.
6
In Article 7 of the Television Without Frontiers Directive (89/552/EEC), adopted on 3 October
1989 by the Council and amended on 30 June 1997 by the European Parliament and the Council
Directive 97/36/EC concerning media chronology, it is laid down that member states shall ensure
that the television broadcasters under their jurisdiction do not broadcast any cinematographic
work, unless otherwise agreed between its rights holders and the broadcaster. The broadcasting
chronology for the economic exploitation of films in the member states of the European Union is
based on agreements concluded between the economic players concerned. Three countries,
i.e. Germany, France and Portugal, supplemented this legislative framework by additional legis-
lation. This Directive is currently under review, and the issue of the harmonisation of the
media chronology across the member states is addressed in this review process.
7
See Young et al. (2010).
Film Finance: The Role of Private Investors in the European Film Market 55
between the different supports for the release of films. Some productions are
targeted only for the TV, video/DVD or PPV market.
The TV channels, in the case of the production of a TV series or when acquiring
the rights for the diffusion of a film, are a major source of funding for producers.
They could intervene in the market either by commissioning the production or
co-production or through presale agreements for the exploitation of the rights on
their channels.
The collection agent is an independent entity selected by the producer, sales
agent and financiers to collect and distribute the revenue generated by the exploita-
tion of the film. In general, the exact position of the different stakeholders in the
recoupment process is pre-agreed, giving confidence to the parties that they will
receive their entitlements assuming that the film generates sufficient receipts. The
collecting agent could also be in charge of paying the profit participants.
Private investors could participate in the financial package of a film or TV series
for tax reasons. The level of commitment of the private investors will also depend
on the existence of tax-shelter instruments available in various European countries,
and they will cover the part of the transactions not covered by presale contracts.
Private equity investors as well as hedge funds are reluctant to invest on a large
scale in EU films due to the long and uncertain time horizon of this kind of
investment and the fragmented nature of the European audiovisual market.
Lawyers specialising in media financing are active in the preparation of the
documentation associated with the transaction. Unlike a property mortgage secured
on a fixed asset with an intrinsic value, loans for the production of an audiovisual
work are secured primarily on contractual distribution arrangements. Given the
complex nature of the intellectual property rights management, production
financing and distribution arrangement and related insurance packages, the produc-
tion company has recourse to a specialised firm of lawyers.
3 The Role of Private Investors
Film producers may benefit from various funding alternatives involving private
investors and private banks: A simple classification according to the source of
funding has to be matched with the various film financing instruments:
1. In-house financing and production-finance-distribution deals
2. Negative pickups
8
3. Distribution sales or presale of exhibition rights (minimum guarantees)
4. TV presales
5. Debt financing
6. End-user financing
8
A negative pickup is similar to a PFD (production/finance/distribution) agreement, except that the
film company (studio or distributor) will pay a fixed price for the completed film, and it is up to the
production company to finance the budget for the film.
56 O. Debande
A common way of financing films is to presell exhibition rights
9
to national and
foreign distributors, for a pre-defined period of time and for a specified geo-
graphical area. The producer can use the guaranteed minimum payment from
distributors to obtain additional financing from lenders or investors (i.e. providing
promissory notes discountable at banks).
This scheme offers more creative freedom to the producer, although he loses the
benefits accruing from the film’s promotion because these are retained by the
distributor. Indeed, the distributor can profit from the price discrimination policy
by managing the promotion on the basis of the rights he has obtained both in terms
of duration and geographical coverage. The preselling of rights to several indepen-
dent distributors makes it difficult for the producer to benefit from the interdepen-
dency between the various exhibition ‘windows’, but at the same time, the producer
benefits from greater creative freedom since the dispersal of the bargaining power
among various distributors lowers their ability to affect artistic choices. Finally, this
scheme implies another sharing of risk due to the absence of ‘cross-collateral-
isation’, since each agreement with a distributor is independent of the others.
Producers generally relying on presale strategies manage to reduce their downside
risks while giving away much of the substantial upside profits and cash flow
potential from hits. The producer will still usually need interim loans to cover
cash outlays during the period of production.
The producer could also presell the rights on his film to national or regional TV
channels. The mechanism shares some similarities with the preselling of exhibition
rights, since the producers could discount the TV channel’s contracts to banks in
order to finance the production of his films. In most of the cases of the presale of TV
rights, the TV channel is a co-producer, which could entail some control over the
artistic package. The use of venture capital funds for the financing of AV works
produced by small production companies appears unsuitable due to the following
reasons:
(a) The uncertainty on the evaluation methods of the rights recorded on the
balance sheet of the company
(b) The lack of adequate exit mechanisms due to the complexity and difficulties of
realising the rights recorded on the balance sheet of the company (the only
potential exit mechanism is the sale of the company assets to another
company)
(c) The importance of the personality of the producer and the assets attached to the
producer with unquantifiable market value
(d) The uncertainty in the development of a film and the need to achieve a port-
folio of a sufficient size properly to diversify risks (e.g. 12–14 films)
(e) The specificity of the audiovisual product
9
See, for instance, Davies and Wistreich (2005).
Film Finance: The Role of Private Investors in the European Film Market 57
3.1 Finance Risks and Mitigating Measures
The main risks for the financing of films
10
are:
• Related to the product:
(a) Cost overruns postponing the delivery and requiring additional funds to
complete the film
(b) Delay in the delivery of the film due to uncontrollable contingencies during
production or post-production stages
(c) Commercial success
(d) Revenue shortfalls due to inadequate estimation of sales forecasts (espe-
cially in the case of gap financing where all the sales contracts are not
signed at the disbursement of the credit facility)
11
• Related to the production company are:
(a) Risks associated with the quality of the balance sheet of the company
(b) Risks associated with the evaluation of the underlying assets, i.e. the films’
rights
(c) Risks related to the size of the overheads costs
Regardless of the financial structure set up for the funding of films or TV
productions, the due diligence process integrates the following elements in order
to minimise the risks associated with the transaction: (1) analysis of the track record
and performance of the producer (number of films produced, rate of performance in
terms of box office, recruitment and management of the team engaged in the
production), (2) review of the film’s characteristics (film scenario, casting, potential
technical difficulties related to the shooting process) and (3) analysis of the film
budget (structure of the financing, co-production and presale contracts providing an
estimate of the self-liquidating nature of the credit, quality of the co-producer,
quality of the final buyers). The types of securities requested are:
• To cover the risk associated with the product: assignment of rights on contracts
generating future film revenues, pledge on the negative, insurances, completion
bond
10
See Vogel (2014) and von Rimscha (2009).
11
With gap financing, banks provide a loan of between 10 and 30% of a film’s budget against the
value of all the distribution markets that remain unsold. An experienced sales agent is engaged to
provide an estimate of what those territories could cumulatively be worth. The bank will typically
lend half of that projected total and demand that at least two presales are already in place as a
measure of a project’s viability. In return for its financing, the bank will be senior in the capital
structure, receiving all income until its principal and accrued interest are fully recovered. As the
presales market continued to soften, the gap has widened further. So-called ‘super-gap’ financing
has recently emerged, essentially a riskier form of mezzanine-style financing in which more (up to
35%) of a film’s budget is borrowed against future revenue projections. In return for financing
more of the budget, super-gap lenders demand higher interest rates.
58 O. Debande
• To cover the risk associated with the company: corporate guarantee or asset-
based securities (library of films)
3.2 The Specific Debt Finance Market
The debt finance market can be split into two categories:
1. The global lenders’ market, where the main players are large international banks
operating from head offices, is Los Angeles and sometimes London. They
concentrate on large deals ($10 million dollars minimum) for large sponsors
(either Hollywood majors, European mini-majors or large independent
companies).
2. The niche domestic lenders’ markets, where players are small specialised
finance institutions (sometimes part of larger retail banks) that provide finance
on the back of national public aid mechanisms for small local production/
distribution companies.
3. Single picture distribution contract-based financing: These deals are usually put
together for independent producers: before engaging heavily in production, the
producer presells its rights to one or several distributors. The distributor
(s) guarantee(s) payment of a certain amount once the film is completed and
delivered. The role of the lenders is therefore to fund the bridge from production
expenditure to receipt of the distributor’s payment. Financing relies on the credit
quality of the distributor(s), the assurance that the film will be completed
(completion bonds are used) and the receivables to cover costs (‘borrowing
base value’) and to avoid funding gaps (although on larger productions gap
financing is sometimes used). There are a variety of structures along the same
theme such as ‘negative pickups’ where letters of comfort are provided to a sales
agent, which offers a series of distribution commitments as security. Contract-
based facilities are short term (12/18 months).
4. Structured finance deals: Such financing tends to be for a longer term (5–7 years)
and more complicated given the structuring and risk aspects. These can take
several forms: (a) insurance-/tax-/accounting-driven structures provided for US
majors or European mini-majors and (b) single film project finance: although
lenders rarely take theatrical performance risks, single film project financings are
sometimes put together for the large US studios. In these structures, lenders rely
on the film’s future box office receipts. The lender’s analysis concentrates on the
suitability of the debt to equity ratio, the talent quality (both directing and acting)
and the commitment to Prints and Advertising (P&A). Studios sometimes offer
partial security coverage in the form of assignment of receivables or rights on an
existing film library.
5. Package financing (securitisation) or slate financing, where debt repayment
relies on the cash flows of an existing film library (cash generated from video
sales and rentals, pay-TV or mainstream TV showings). These structures are
relatively common in the USA (given the extent of the US major film libraries)
but have so far failed to take off in Europe. In the case of independent producers,
Film Finance: The Role of Private Investors in the European Film Market 59
little collateral can usually be provided to back a loan except by having recourse
to presale contracts and other rights agreements relating directly to the produc-
tion (making a production loan more akin to an account receivable scheme). The
lender then has to look at the creditworthiness of the licensees for repayment of
the loan and is hence exposed to the risk that a licensee fails to accept delivery of
a completed picture, especially for loans with a relatively long term. As a
consequence, the best option is to lend a fraction of the total amount of the
presale advances or better still to design the loan on the basis of a portfolio of
films to ‘cross-collateralise’ the risks between the various films. Various German
companies (such as Constantin,Kinowelt and Helkon) have raised significant
amounts of funds on the Neuer Markt, invested essentially in American produc-
tion. However, with the end of the Internet bubble and numerous bankruptcies
among media companies, the market perception dramatically changed, reflecting
the lack of trust in the valuation of the companies and the inadequate business
model.
4 Film Financing in Europe: Diversity Prevails
The fragmentation of the European audiovisual industry is characterised by the
existence of a fringe of small undercapitalised firms, especially in the independent
production sector, working on a film-by-film basis, facing difficulties to access the
funding required for the development of their activities and to create the conditions
for a sustainable business model. When production companies are forced to sell the
rights to their film or TV programme to secure the next production, they are self-
perpetuating the vicious circle of undercapitalisation. In addition, the sector
continues to depend a lot on public support scheme.
12
In some cases, the micro-companies do not have a sufficient balance sheet to
have access to debt financing.
13
Indeed, a bank will only consider a level of equity
equal to the amount of the loan (50–50 financial structure as adequate), implying de
facto that only the major American companies would be able to produce films. An
adequate level of equity should reflect the peculiarity of the audiovisual industry;
however, the undercapitalisation of numerous small independent production
companies implies that quite often the producer does not have enough funds at
the end of the production of a film to invest the adequate funding for the develop-
ment of a new project. This partially explains the lack of investment observed in
Europe at the development stage. In such a situation based on a film-by-film
approach, the risk-reward ratio is too negative to attract private investors.
14
12
European Commission (2014).
13
Berger and Udell (1998) and Binks and Ennew (1996).
14
A common complaint is that investors do not have ‘anything to invest in’, reflecting the ‘here
today, gone tomorrow’ nature of many single-project production companies. Report to the
Secretary of State for National Heritage (1996). The Advisory Committee on Film Finance (p. 18).
60 O. Debande
It is indeed well known that, as a rule of thumb, Hollywood majors are unlikely
to achieve more than one or two successes for every ten films produced. Differing
from European production companies, US majors are able to cross-collateralise the
losses and the benefits over an adequate portfolio of films (without considering the
revenue generated by the exploitation of the rights of the ‘unsuccessful’ films in
terms of box office in other media).
15
The European audiovisual market also suffers from a lack of transparency
concerning the accessibility and quality of the balance sheets of a lot of entities
active in the production and distribution sectors.
16
This situation results from the
limited number of listed production companies on European stock markets since the
majority of independent producers are too small to justify listing and from the lack
of harmonisation of the accounting policies/practices of the audiovisual companies
within national markets and across Europe (valuation methods of library of films,
amortisation rules). When considering a production company having access to the
financial market, the financial structure for a filmmaker is based on an interest-
bearing loan facility on a secured basis.
The security usually takes the form of presale contracts with distributors or TV
channels for contractual minimum guarantees, the discounted value of the contracts
being generally equal to or in excess of the production budget and the cost of
financing. The advantage of such an approach for the producer is that she/he is in a
position to retain control and ownership of the film and its profit stream once the
bank’s loan, interest and expenses have been repaid. In general, the commercial
bank is not asking for a participation in the profits of the films but is providing
additional finance services to the producers generating additional fees for the bank
and minimising risk taking. Due to regulatory, historical, legal and cultural reasons,
the financing arrangement of AV products remains quite different across Europe.
To illustrate this diversity, an analysis of the typical financial structure for a film in
France and in the UK is provided.
4.1 The Typical UK Financial Arrangement
In the UK,
17
the financing of an independent film or TV series production is often
structured on a project basis (as in a project financing deal) and, if fully collateral-
ised, is on a non-recourse basis, i.e. no recourse on the filmmaker’s balance sheet.
The borrowing entity is usually a single purpose vehicle (SPV) of nominal capital
whose assets will be the rights to the story and as the production is progressing, the
film itself. On the liabilities side of its balance sheet will be the nominal capital and
the production loan, assuming the cost of the film is fully covered by presales. The
advantage of such an arrangement for the producer is that he is in a position where
he can retain control and ownership of his film and its revenues after deduction of
15
Amram (2003).
16
European Commission (2013).
17
Alberstat (2012) and Davies and Wistreich (2005).
Film Finance: The Role of Private Investors in the European Film Market 61
the various sub-distributors’ shares and once the bank’s loan, interest and charges
have been repaid.
The role of the producer is to arrange the financial package for the film or TV
programme, based on the concept of the creation of bankable security through the
presale of rights. The producer will sell his rights for the exploitation of the film to
distributors and TV channels, which, on the basis of various elements (script,
actors, producer and director’s reputation and track record), will buy all or partial
rights to exploit the film in a territory and/or media. The distributors will agree to
pay a minimum guaranteed amount on the account of the producer’s share of
income derived from the exploitation of the particular rights with the payment
being made at specific point in time—signature, delivery of the film and date of
video availability. The objective of the producer is to find enough contractual
agreements with distributors to cover the budgeted cost of the film and the cost of
the loan to finance it. The loan provided by the bank usually covers 80–100% of the
film costs. In fact, the financing could be provided for a project covered by a
minimum of 80% of presales when the producer works with a well-known sales
agent. If this is not the case, the coverage in terms of presales has to reach 100% of
the film cost. In other words, a maximum gap of 20% could be considered by a
commercial bank only when the producer has a well-established track record within
the bank portfolio and has recourse to a reliable sales agent and major territories are
available with an estimated presale value which exceeds the uncovered amount by a
ratio of 1.5–2 (not including the sale potential in the USA).
Gaps might also be covered by deferrals of fees (producer or actor fees), equity
put into the project by investors for tax motivation, grants given by European/
national/regional public authorities and co-production arrangements or facilities
deals in various countries. Finally, the gap should be covered within 1 month from
the end of the principal photography. Distribution fees and other commissions are
not paid by the sales agent until the gap is covered by distribution contracts unless
they have been budgeted. The commercial bank, and especially in the case of a
financial package including gap financing, requires the provision of a completion
guarantee by the producer. The completion guarantor undertakes an in-depth
analysis of the estimated budget of the film to identify the risks of cost overruns.
This guarantee, provided by specialised insurance companies (such as Film
Finances (part of Lloyds), International Film Guarantors (Fireman Fund) and
CineFinance), secures the bank’s loan through the provision, within a specified
timeframe, of the elements required to trigger the minimum guarantees provided by
the distributors and of the amount of funds required to complete and deliver the film
in the case of any cost overruns during the production of the film. The disbursement
of the loan by the bank will be linked to a precise timing. Where other financing is
involved, whether to cover a gap or as part of the producer’s plan of action, the bank
will usually require that its loan is only advanced after all other funds have been
disbursed. This sequence of disbursement is related to the completion’s guarantor
obligation becoming callable only if the full cost of the film has been provided.
62 O. Debande
4.2 The Typical French Financial Arrangement
The financing of films and TV programmes by commercial banks or specialised
financial institutions in France is based on a different structure resulting from
mechanisms specific to the French market in terms of regulatory and institutional
environment (Centre National de la Cine
´matographie—CNC), legal environment
(Registre Public du Cine
´ma et de l’Audiovisuel providing the security framework to
have valuable and certified guarantees on the rights associated with the film) and
financial structure (Soficas which are specific tax-deductible investment funds
created in 1958 to offer attractive tax-efficient products to wealthy clients and
corporates and act as co-producer although they are not entitled to any rights in
the film’s negative).
18
In addition, the market is dominated by specialised financial
institutions.
The financing of a film is based on a transaction where there is a full coverage
(100% or more) through presales with distributors and TV channels. The security
package requested by the banks of the producer includes the assignment of the
claims arising from presale distribution contracts, the assignment of the potential
support entitlement generated by the various European, national or regional public
support schemes, the assignment of the share in any co-production agreement or
from any tax-shelter or tax-driven mechanism supporting the production sector. The
proportion secured to presell agreements with TV channels is bigger than in the
UK. The financial arrangement does not include recourse to a completion bond. As
a consequence, the specialised financial institutions active on the market play the
role of the completion guarantor. A way to compensate for the non-recourse to
completion bond is to request a recourse on the production company assets,
assuming that the company has a sufficiently viable financial structure and
mobilisable assets on its balance sheet. The characteristics of the production
companies imply that access to this type of security remains limited. The legal
documentation for the financing structure of a film or a TV programme is less
demanding in France than in the UK.
The French financing market is characterised by the existence of a guarantee
fund, called Institut pour le Financement du Cine
´ma et des Industries Culturelles
(IFCIC),
19
which provides guarantees to credit facilities set up by commercial
banks to producers. The main beneficiaries of IFCIC are independent producers
who benefit from direct IFCIC financing for film or TV production or from counter-
guarantees of bank financing of their activities. Access to IFCIC instruments is
restricted to French producers or co-producers,
20
and only commercial banks being
shareholders of this institution can benefit from the guarantee scheme. The purpose
of such a guarantee fund is to facilitate the spreading of investment risk and to
enable a sound portfolio approach for investments in the audiovisual sector.
18
See, for instance, Gaillard and Loridant (2003) and Sauvaget (1999).
19
For more information on the IFCIC, see the website at www.ifcic.fr.
20
Knowing that France has signed co-production agreements with numerous countries except the
USA and Japan.
Film Finance: The Role of Private Investors in the European Film Market 63
The analysis of the UK and French approaches to film financing shows the major
differences between a market characterised by recourse to market contractual
mechanisms with a strong legal environment offering the adequate enforcement
procedure (the UK situation) and a market characterised by the development of
institutionalised legal rules limiting the complexity of complete financial
arrangements and mimicking partially (or trying to replicate) arm’s length contrac-
tual relationships. The contractual structure induces a different sharing of risks
between the various players and a trade-off between the reduction of uncertainty
and flexibility in the management of the contractual relationships. The financing of
French productions or co-productions is heavily dependent on the broadcasting
market. TV channels face various obligations to invest in French co-productions,
associated with quotas of French and European films to be broadcast, restrictions on
the number of films broadcast on a weekly basis and regulated elapsed time for the
release of a film after cinema theatre exposure [differing between free-TV channels
(2 years after theatrical release) and pay-TV channel dedicated to cinema (1 year)].
The nature of these obligations depends on the type of broadcaster, i.e. generalist
(free-TV channels) versus specialised (pay-TV) channels. For the former, they have
a co-production obligation defined as 3% of their turnover, while for the latter
(initially only Canalþ), it corresponds to 20% of the turnover. As a consequence,
TV channels, either through co-production, where they invest funds during the
production phase having rights in proportion to their investment on the negative and
future revenues of the films, or presale contracts by which they purchase the right to
broadcast films on their channel paying upon delivery of the completed film,
become key players. The positive consequence is the provision of an important
regular source of funding, leading to additional effects such as the increase in the
value of French and European film libraries through the ‘quota effect’, the
contractualisation of the relationship between film industry representatives and
Canalþand increased competition between TV channels on their specific release
window. However, the relation of dependence created between the cinema industry
and the broadcasters increases the vulnerability of the film producers to downturns
in the broadcasting market. In addition, it could induce ‘interference’ in the artistic
and commercial quality of the films designed to reflect more the demand from the
broadcasters than the one from cinemagoers in a market already dominated by US
films (in terms of box office market share).
5 Conclusion: Private Investors Still Missing in Europe
The recent evolution in SME financing seems to demonstrate an increase in bank
lending to SME but not benefiting to the same extent to SMEs active in the cinema
industry due to the intangible nature of their assets and collaterals, the limited size
of the market and the concentration of funding in specialised financial institutions.
The access to debt financing for producers also varies in function of the size of the
country. Indeed, in small countries with a low production capacity reflecting the
restricted linguistic and geographical size of the final market, the level of activities
does not favour the emergence of specialised financial institutions. In general,
64 O. Debande
producers rely on the traditional banking network, which exacerbates the impact of
the lack of expertise of the financial institutions (and hence the ability to assess in a
proper way the level of risk attached to an operation). Moreover, in the absence of
dedicated internal departments dealing only with audiovisual financing, the ability
of the producer to secure financing is linked to the creation of a privileged
relationship with a banker based on mutual trust and specific soft knowledge. The
continuity of such a relationship is more versatile, partially depending on the bank’s
internal risk policy.
The due diligence process for the financing of small production companies rests
on ‘soft issues’ related to the knowledge of the people active in this sector and
market practices. A credit analysis only based on a classical corporate approach
(e.g. balance sheet analysis or minimum size for structured transaction) could not
allow the relevant issues for evaluation of a funding request to be addressed. The
support for major productions in France is done through classical corporate loans,
while in the UK the structure is mainly based on the creation of an SPV for the
financing of independent producers or major players.
The mix of the industrial structure of the Europe’s film industry, the lack of an
integrated market for European films and the strong reliance of SMEs and mid-cap
companies on banks financing combined with public sector support prevent the
emergence of an active class of private investors. In addition the lack of transparent
and reliable information on the track record of producers and distributors does not
favour the entry of private investors in this market. The recent Capital Market
Union initiative launched by the European Commission
21
and the emergence of
alternative non-banking funding sources such as the crowdfunding or mini-bond
markets might create new opportunities for private investors that could percolate to
the film industry.
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Olivier Debande is currently working as managerial adviser and heading the Institutional and
Regulatory Unit within the European Investment Bank General Secretariat, in charge, among other
things, of following institutional and regulatory development at EU level. He holds a Ph.D. in
economics from the University of Brussels.
66 O. Debande
