Industry Report: Financing
The Role of Banks in the European Film Industry
by Cartoon, the European Association of Animation Film
25/06/2010 - Juliane Schulze is Senior Partner and Consultant at peacefulfish, a strategic consulting firm providing business services to the audiovisual industries which is based in Berlin. She specialises in creating financing solutions, fund models and innovative financial instruments for the film and digital content industry.
The MEDIA Programme of the European Commission contracted peacefulfish in late 2008 to carry out a study on “The Role of Banks in the European Film Industry”. What were the objectives of study?
The study was commissioned to identify the European banks active in the audiovisual sector. We tried to understand the current lending models and we made some recommendations to the MEDIA Programme for potential intervention in the area.
What are the main lending models?
We identified 5 main lending models:
1. Interim Finance. Typically these models are classic contract discounting. The bank cash-flows against established financing agreements or opens credit lines which producers pay back as film moves on.
2. Tax-Incentive Financing. We have two kind of services: the Tax Credit cash-flow which is a guaranteed finance with real cash value comprised between 10% and 20% of the production budget; or Tax-Incentive Gearing which combines lenders’ financing with capital from 3rd-party private investors.
3. Gap Finance. We have identified two Gap Financing: the Classic Gap Financing (10-15% of the production budget cash-flowed against MG for unsold territory) and the SuperGap Financing (up to 30% the production budget cash-flowed against MG plus a government backed guarantee).
4. Working Capital/Corporate Finance. This model works only for U.S. studios that have important assets like library of movies and A-list projects every year.
5. Bank Guarantees. This model exists for example in few European counties (IFCIC in France, Landesbürgschaft Structure in Germany). The production company receives a loan from a commercial bank against a guarantee from financial institution to mitigate the risk.
Why do film producers need bank loans?
There are many reasons fro that: to cash-flow pre-sales, minimum guarantees, subsidies, tax incentives, private equity, which are paid out in instalments over the course of the production.
What are the conclusions of your study a far as the production sector is concerned?
First of all the film banking is inherently linked to production levels. Banks specialised in the audiovisual sector exists mainly in the big five European territories. Only 5 member countries of the MEDIA Programme have a production output higher than 40 films a year: France, United Kingdom, Germany, Spain, Italy. Film banking services are available mainly in these 5 countries.
Bank loans (interim finance and working capital) are very difficult to access for small production companies. The study suggests that film producers should try as much as possible to retain IP rights of the films instead of licensing them to have the possibility to access to private investments and bank services.
We must recall that film production and film sales are primarily project and fee-based businesses rather than company-based businesses. The private investors are more interested in company-based investments.
According to the financial institutions we met, most European film producers do not fully understand the film business, specifically the sales and distribution side and how that intersects with the banking industry.
Is there a real market for banks in Europe?
There are several pre-requisites that have to be met. Financial institutions are getting involved in productions with budgets over €1.2m. Only 8 of the 32 MEDIA countries have an average production budged above €2M in 2007: Austria, Sweden, Denmark, Italy, UK, Germany, Spain, France. This is the reason why the market size for film banking services is limited by production output and budget levels. Banks classify this sector as “high risk”. The back-office cost of film lending does not justify the return for many of the players. Furthermore film industry expertise within financial institutions is rare, making film banking a niche business.
What kind of services are then offered by banks in Europe?
Banks provide loans not equity capital. Loans are considered to be less risky. Producers pay an interest and a services fee. The loan is fully repaid within specific time period.
The main problem is that at the moment the liquidity is very low and many financial institutions don‘t actively lend.
Gap financing services are currently offered only by few banks - mostly in Germany.
Few French and German financial institutions provide development loans, but loan amounts are very low.
Why these services are not well developed in Europe?
If we take the example of the tax-based lending we realise that they are very complicated by gearing schemes and by the “interpretability” of ever-changing tax laws.
A second element is that film banking services require a high level of customisation in order to assess the risks linked to each specific operation. Many times there are no resources available within the banks. This explains why working capital loans for small and most established production companies are not available unless they have assets.
A third reasons of the limited development of the film banking sector in Europe, is that financial institutions typically do not lend to production companies based in another country. We identified as main reason a lack of a cross-border legal framework for institutions to access and evaluate the financial track records of foreign production companies.
Can the European Investment Bank play a role in favouring the development of the banking sector?
The European Investment Bank can only issue direct loans for €25m and more. The EIB has nevertheless a mandate to support European SMEs, but requires syndication partners in order to offer film banking services. Syndication between the EIB and a national bank has been hindered as most banks don‘t want to share transaction fees.
What is the potential or cross-border lending in Europe?
Cross-border lending to European production companies has occurred using the IFCIC loan guarantee. Since 2006 IFCIC guarantees loans for non-French, European co-productions through French financial institutions such as Coficiné, Cofiloisirs, and Fortis Mediacom Finance. IFCIC also guarantees loans provided by non-French financial institutions.
Which recommendations did you made to the MEDIA Programme?
We basically proposed three actions:
1) To develop a business training initiative for producers seeking to utilize film banking services;
2) To contribute to the expansion of 3rd-party guarantee funds that guarantee film related loans. The MEDIA Programme could for example contribute funding to IFCIC’s cross-border guarantee system or work with Audiovisual SGR in Spain to increase the number and the size of the provided guarantees. The guarantee lowers the bank’s risk and makes film banking more attractive. It lowers also the interest rate the production company has to pay for the loan. Finally the guarantee by an expert fund provides valuable 2nd judgment on the film project;
3) To create a cross-border network of financial institutions to provide film banking services and/or a network of experts to evaluate film banking applications.
What elements a production company should prepare when approaching a bank?
Track records are very important. Production companies should bring track records and assets of all involved production companies. It is also important to provide sales estimations by a sales company. It is essential to present the track records of the management team or any element that can reassure the bank.
A second element is a full business plan with at least the following elements: the creative package surrounding the production (genre, cast, director, etc.), the international distribution, the financing plan, the financing sources (agreements, their cash-flowing etc.), the forecast revenues, the estimated return on investment (ROI) and the expected cash flows.
Lenders conduct their standard company evaluation based on the company’s balance sheets for the previous 2-3 years of operation as well as their accumulated assets. No loans are approved without this rating.
Is it possible for small production companies to get a loan?
It is difficult. Lenders look at an annual turnover of ~€10m or higher. Companies should have the capacity to produce at least one international project a year. Production companies with one film every two years or single-purpose companies are not in an ideal position to obtain a loan.