g The Film Panel Notetaker: No Borders Case Study with John Hadity - Sept. 17, 2008

Tuesday, September 23, 2008

No Borders Case Study with John Hadity - Sept. 17, 2008

No Borders Case Study with John Hadity
Independent Film Week
Wednesday, September 17, 2008
FIT – Katie Murphy Amphitheater – New York, NY

Last Wednesday at Independent Film Week, No Borders International Co-Production Market presented a Case Study on Single Picture Financing with John Hadity, President and CEO of Hadity & Associates, Inc., a consultancy firm that specializes in risk management and production finance for film and television. I have included the main outline of that presentation below with highlights of the transcription of Hadity's discussion. I found the discussion and presentation to be very informative. While a lot of information to ingest, this seems to be a very handy “how to” resource for producers looking for multiple ways to finance their films.

Before Hadity began his presentation, he said, “I thought it would be important to have a conversation with you about what’s happening right now out there in the finance world. With all the news last week, everything is in the toilet. I’m going to give you a bit of an overview so you understand when you are talking to finance people, you understand what’s in their head and what they don’t want to hear and what they do want to hear. I would say 99% of the time, you’re going to hear ‘no.’ It’s important that you understand why they’re saying things like that and how maybe you can mitigate your own risk before you go into these meetings. The second part is a break down of a case study of an alternative way of financing the film.”

Part 1 – Industry Overview

Health of the Industry
* These numbers are for 2006. Hadity noted that he has not yet seen all the numbers for 2007

“Box office is fairly in the same place. Theater admission down, although the number of releases have certainly gone up. This year, there were over 5,000 entries to Sundance. 10 years ago there were 500. There were a lot of movies being made and fighting to get on screen and fighting to stay on screen for over two weeks. There’s a lot of competition out there. But still, this is a very healthy industry. This is an industry an industry that’s not correlated to any asset class. When the economy is in the toilet and people don’t have money, they still go to the movies. It’s because they can’t afford a new car. They can’t afford a new house, but they can take their families to the movies."

Studio Concerns

“To give you a snapshot of what was happening in 2004/2005…what happened back then had a severe effect on independent producers and production companies that tried to finance their films. Studio movies cost about $100M. Studios were very concerned about these escalating costs. All of these studios have other businesses that they’re involved with and to tie up $100M at the time in cash, it was really crippled. They still needed to feed the distribution pipeline that was in fact the lifeblood. But they did see that all of these revenue streams would change them. In Variety or The Hollywood Reporter, you’d see how long or short a period of time films are actually on the screen, unless they are absolute break out successes. There’s an incredible amount of energy put into finding other revenue streams or enhancing other revenue streams in pictures. By far the priority is to downsize any kind of risk."

- Escalating film costs
- Cash Management
- Need to continue to feed distribution pipeline
- Revenue Streams are changing
*Pay TV deals are diminishing
*Windows are getting shorter
- Increase in piracy
- Manage downside risk

In the Financing World

“At the same time in the financing world, there was a huge growth in private capital. Hedge funds, most of the time, really didn’t hedge anything. Since 1990-2005, there’s been about a 20% growth in private wealth. There was...a year ago, almost one and half trillion dollars under management. Basically what was happening in the hedge fund world…the private capital world…is people needed a lot of cash. We have to take a very small part of our patch and invest it into something that is high risk/high reward. Let’s say 5%. There is no magic number. But most mandates were probably around 5%. Take that and put it into a high-risk category business…film got chosen. Why…first of all it’s sexy. The first thing whenever I’ve gone and stayed in a room with people with private capital that were interested in investing in a slate of movies or with studio slate deal were like, how many tickets can I get to the premiere? There are hedge funds, private capital, and banks that are comfortable with what’s called the Monte Carlo method…literally a software program that enables a financial analyst to role the dice how ever many times you want. How many times can you role the dice and lose? The Monte Carlo method is actually used to evaluate a number of slate deals that are trying to get financed by studios, specialty labels and production companies.”

- Influx of Capital
*Private Equity Growth since 2003 = $580 billion
* 20% hedge fund growth since 1990
* $1.4 trillion under management today
- Portfolio Diversification
*New asset classes
*High risk/high reward
*Comfort with statistical analyses (Monte Carlo method)
*Gap and Super Gap opportunities
*Sexy business

Recent Transactions (Recently Completed Film Deals) – 1st Page

“The first deal was August of 2004 with Paramount…a $300M deal to finance 26 films over a 5-7 year period. The arrangement on these deals, every single major investment bank is involved. If they’re not the arrangers, even the Weinstein Company deal with Goldman Sachs was a billion dollars. You have to understand that Goldman Sachs did not underwrite a billion dollars. There’s an equity component to these deals and there’s a debt component to these deals. Typically the debt in these deals is syndicated out to a number of banks. I promise you, every single bank that you’ve ever heard of has participated in…at this point it was $10.6 billion.”

Recent Transactions (Recently Completed Film Deals) – 2nd Page

“It’s over $15 billion now that has been invested into our world. And I heard someone say at dinner recently that they thought it’s more like $24-$26 billion. These deals started back in 2004, and the post-mortem is actually just starting on these deals. A lot of people that participated in these deals, especially on the debt side, are less than pleased with the results they’re seeing. The numbers that they were talking about and throwing around to each other around board rooms and conference room tables were more like 14%/16%/18%/22% returns. I think the first numbers that were actually publicly released was 4%. So people are not very happy with the performance of these deals so they are actually re-negotiating some of these deals or scrambling for a way to refinance them. Couple that with the credit crisis that’s happening right now and one thing you really need to be aware of is a banker or a hedge fund manager or investment arranger is that you’re talking to sales people. These people are in charge of bringing deals in…they’re called originators…their job is to bring in investment opportunities to financial institutions. They are not the people who are going to approve the deal. They’re going to sit and listen to your deal and tell you that it has a lot of potential, but at the end of the day, the person who’s going to make a decision is going to be a credit desk. The person behind that credit desk is going to be looking at this investment from a risk management perspective asking...What if these movies don’t perform?”

Producer Driven Financing Transactions

“There were a number of very high-brow independents that were successful in getting their slates financed. That still happens. We’re still reading about that, but from a credit desk perspective…somebody at a bank isn’t going to want to hear you have 10 really good stories. Somebody at a bank is going to want to have proof that you have a revenue stream somewhere behind you that can support the kind of money that you want to borrow from a bank. The larger independents are pretty much well taken care of. The real challenge here is to get the thousands of independent producers out there that are trying to get their movies financed on a one-off basis typically to get them their financing.”

Indy Film (“One-Off Financing)

Studio Financed
- Advantages – Money already there; Negotiating Muscle; Guaranteed Distribution; Worldwide Exposure
- Disadvantages – Lose Creative Control; Inflated Budget; Pushed Participation; Gun for Hire
Independently Financed
- Advantages – Maintain Creative Control; Controlled Costs; Better Odds for Participation; You are your own boss
- Disadvantages – Need to fundraise; Weak negotiating position; Guaranteed Distribution unlikely; Exposure Uncertain

“When I crossed over to the light side…I remember my first experience in financing a one-off picture…it was around $60M. The studio that had intended to distribute it actually budgeted the movie at $130M. The producer of mine loves to tell the story…the visual effects house that we would have used…was about 19x cheaper than using the studio’s VFX house…the studio said it’s okay, it’s soft money.”

Financing Vehicles

“Soft money is probably the number one way to finance a portion of your movie. It is absolutely irresponsible to make a movie today in a territory or in a state or in a city that does not offer an incentive, unless it’s your money. If it’s your money, you can do whatever you want. If you’re using someone else’s money to make a movie, you should not be filming in California. You should not be filming in states that do not offer incentives. This is free money. They’re incentivizing for you to come and spend money there. They’re rewarding you for dumping money into their infrastructure. You’re creating jobs. You are helping their economic development. This is free money you should take advantage of. I personally will not help people finance a movie that’s not being filmed in an area without incentives.”

Soft Money (“Incentives”) – 1st Page

“It’s really important to understand the nature of the incentive you’re chasing, because you don’t want to go there…spend a lot of money and then be left at the alter. There are a lot of people out there who know how to navigate through these incentives. It’s the film commissioner’s responsibility as well to be able to guide you through all of these resources…Any economic development person will take a meeting with you if you say the words, ‘I will create jobs.’”

- Refundable
- Transferable
- Rebates/Grants
- Up Front/Backend Production Funding

Soft Money (“Incentives”) – 2nd Page

- Best Practices

Soft Money (“Incentives”) – 3rd Page

- Web Access Tools

Production Incentives
- Domestic & International – http://www.productiontaxincentives.com/
- Canada – www.canadafilmcapital.com/taxcredit/index.html
Film Commissions
- Worldwide – http://www.afci.org/

Co-Financing Partners

“Understand that whatever percentage of the budget they’re going to put up, they’re going to want that percentage of everything that happens on the back end coming back to them. Partnerships are not about free money…now it really is about finding a partner who wants to share in your reward.”

- Studios
- Distributors
- Post Facilities
- Production Companies
- Passive Equity Investors
- Film or Media Funds
- Integrated Marketeers
- Brand/Rights Sharers
- Etc.

- Typical pro rate Scenario: % Financing = % Ownership

Production Loans

“This has a direct effect to all of those $15-$24 million worth of deals. There are still banks out there that will deduct the money, but their capacity for risk is substantially less than it used to be. You used to be able to walk into a bank telling your story and creating a very good picture about the potential profitability of your movie, and the bank would…once they felt comfortable…the bank would probably take risks that they just cannot make today. All of these loans are collateralized…now more than ever, self-bonding is not an option. You will have to get a completion bond on your film.”

Foreign Pre-Sales

“You can find co-financing partners in foreign sales agents, foreign sales companies and in distributors of the foreign territories. You don’t make a decision to make a movie without talking to foreign sales people. You shouldn’t go out there and make a movie without having a conversation with somebody somewhere that’s an expert in foreign sales…what kind of currency does this film have in the rest of the world outside of the United States? They can certainly tell you that American comedies are very challenged to travel abroad. Because of that, it’s going to help you to cast a movie with somebody that does have currency in a foreign market to minimize the risk that your comedy isn’t going to travel well abroad.”

Negative Pick-Up

“Negative pick-ups are pretty hard to come by unless you have somebody pretty extraordinary attached to the budget or it’s just a great story that a distributor wants his hand on. The deal is really simple…the money comes from a bank. You’ve got a producer and a distributor. The bank agrees to provide a loan to the production, the production agrees to make the movie and deliver it to the distributor. And the distributor is going to pay off the bank loan. A letter of intent nowadays means absolutely nothing. It is really a lovely thing to have…never take a letter of intent into a financial institution because it really carries no weight.”

Gap, Mezzanine, and Private Equity Financing

“When you look at investments in movies, equity is cash. It’s the riskiest money out there. People who make an equity investment in your film are entitled to a much better reward. They sit behind everybody else back with you, but they’re going to get a higher return. They’re paid last, but they hold a higher reward than the lender will get.”

- GAP – Last in, first out. Secured against foreign sales. (est. ROI 12-14%)
- MEZZ – Sits behind GAP. Secured against some part of the revenue stream. (est. ROI 18-22%)
- EQUITY – Sits behind Mezz. First in, last out; Entirely performance driven. (est. ROI mid-20s to mid-30s %)

Integrated Marketing

“Integrated marketing has become an incredible buzz word…it’s what we used to call product placement, but it’s much bigger. These deals are incredibly difficult to put together and to use as cash. More often than not, these integrated marketing deals are marketing support for the movie. They’re not going to give you cash up front to use to cover your production. They’re very rare and often involve conversations at a corporate level that you will not be able to have. I would always recommend that you first look at the kind of marketing support that you can get for the release of the film and that might actually help you go and raise the P&A money. With a lot of these integrated marketing deals, you don’t really get the majority of the cash until your partner can look at the movie.”

Part 2 – Financing a Single Picture


- Assumptions: $5M budget, UK Production, Bollywood actors, post in UK, American producer/director/writer/

$5M (100%) Budget
-1.25 (25%) UK Tax Incentives
-1.5M (30%) UK Tax Incentives
-200K (4%) UK Post & VFX (equity co-producer)
-800K (16%) UK rights (presale)
-200K (4%) India/Pakistan/Sri Lanka rights (presale)
-1.05M (21%) Equity/GAP
$0 (0%)

UK Tax Incentive

- UK Spend = $5M
- UK Tax Incentive = 25% of UK spend
- UK Benefit is $5M x 25% = $1.25M

Equity Co-Producer

- Post-Production budget = $1.5M
- Offer post facility co-producer credit & 30% revenue stream for $1.5M
- Benefits to co-producer: Increased visibility, workflow, revenue stream
- Will co-producer cashflow the UK tax incentive for a fee?

UK Film Council

- Grant Application eligibility due to UK content
- Usually capped, but each project is treated individually
- Benefits to Film Council: Increased visibility, supports inward investment and economic development, creates local jobs

Foreign Presales

- Presale of territories
- Need foreign sales agent
- Need foreign sales estimates


- Leverage foreign sales estimated for unsold territories as collateral
- Only use bank-approved foreign sales agents
- Angel investors are the hardest thing to find

Other Considerations

“Any piece can fall out at any given time.”

- Script
- Chain-of-title
- Reasonable budget expectation
- Corporate set-up and compliance
- Letters of intent
- Completion bond
- Production Insurance
- Payroll
- Banking
- Financing reporting
- Delivery
- Distribution/Sales

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At 11:35 PM , Blogger Ken said...


I enjoyed reading this case study. I had a question regarding how are SOFT MONEY contributions are valued with respect to HARD MONEY contributions.

For example, if two producers (A) & (B) come together to pool their resources to make a film - Producer (A) contributes $40K HARD CASH, and the Producer (B) contributes, $5K HARD CASH and $1MM in SOFT MONEY contributions how is the soft money valued in terms of "recoupment", and how (in a fair and equitable manner) would you recommend the profit percentage be split?

Obviously, Producer (A) is entitled to recoup his hard $40K -

And Producer (B) is entitled to recoup his hard $5K -

But... would Producer (B) also be entitled to recoup any (cash value) amount for the $1MM of SOFT MONEY CONTRIBUTIONS that he brought to, or, afforded the production?

And... how would you suggest the profit percentage be split between the two producers according to their contributions?


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