Film Finance: The Role of Private Investors
in the European Film Market
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.
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
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
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.
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
See, for instance, Davies and Wistreich (2005), Vogel (2014) and Young, Gong & Van der
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
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
(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
implies a high
variance of gross proﬁts from ﬁlm to ﬁlm. The ﬁnancing arrangement of an
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.
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
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
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
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.
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)
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
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
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.
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.
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
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
3. Distribution sales or presale of exhibition rights (minimum guarantees)
4. TV presales
5. Debt ﬁnancing
6. End-user ﬁnancing
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
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
(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
(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
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
• 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)
• 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’
(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
See Vogel (2014) and von Rimscha (2009).
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
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/
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
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.
In some cases, the micro-companies do not have a sufﬁcient balance sheet to
have access to debt ﬁnancing.
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.
European Commission (2014).
Berger and Udell (1998) and Binks and Ennew (1996).
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).
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.
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,
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
European Commission (2013).
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).
In addition, the market is dominated by specialised ﬁnancial
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
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,
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.
See, for instance, Gaillard and Loridant (2003) and Sauvaget (1999).
For more information on the IFCIC, see the website at www.ifcic.fr.
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
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