Funding freeze casts shadow on the silver screen

By Matthew Garrahan 2008-10-15
He may be the king of the silver screen but it seems not even Steven Spielberg can thaw the freeze in credit markets.
JPMorgan Chase was due to begin syndicating $700m of debt this week for DreamWorks, the studio started by Mr Spielberg and backed by Reliance Big Entertainment, an Indian media group.
The debt, together with about $500m of equity from Reliance, was to bankroll DreamWorks after Mr Spielberg decided to take the brand out of Viacom, the media group that bought the studio three years ago.

However, with the financial crisis continuing to wreak havoc, JPMorgan has put the debt syndication on hold until markets have stabilised.
DreamWorks is confident the syndication will go ahead and intends to launch its new operation in January as planned. The company has not yet finalised its first list of films so has time to raise the debt.
However, the delay illustrates a broader problem for Hollywood, which has come to rely on Wall Street money to offset the risk of costly film productions.
Most of the big studios have struck financing deals where third-party money is pooled and invested in several films.
Yet new debt has become almost impossible to arrange and is, in most cases, prohibitively expensive.
“The money that's already in the system [in the form of existing slate deals] is still available,” says Don Starr, chairman of Grosvenor Park, a boutique finance house that loans money to film producers. “But it's unlikely these deals will be renewed.”
Metro-Goldwyn-Mayer had the misfortune to time its own foray into slate financing as the credit crunch began to bite.
The studio has been trying to finalise a $500m deal since mid-2007 to fund franchise films, including the 23rd James Bond film [the one following Quantum of Solace], another outing for RoboCop and a two-part version of The Hobbit.
The company had been in talks with Royal Bank of Scotland for months. Then, last month, Lehman Brothers collapsed, sending tremors through the banking sector. MGM declined to comment on the progress of the RBS financing, which is still in the works, although the studio is known to have had interest from two other banks.
Its short-term production needs are covered and it does not need the RBS money immediately: like DreamWorks, it can afford to wait until credit markets stabilise.
Other studios have also had to modify their plans because of market conditions. Paramount Pictures recently shelved a $450m Deutsche Bank deal that would have helped finance 30 films, including the sequel to Transformers, which is due out next summer, and The Curious Case of Benjamin Button, starring Brad Pitt. It postponed the deal when the cost of the senior debt component became too onerous.
Yet even with the credit freeze, industry executives are confident the film financing model will endure.
“It's not dead by any means,” says Ryan Kavanaugh, who has arranged slate deals through his Relativity Media group. “There are a lot of people in the film business that need money and there are still banks competing for these types of deals.”
Structuring deals has become more expensive, he adds, while the freeze in credit markets “certainly doesn't make us overly happy as we won't employ as much leverage as we traditionally would”.
Relativity is backed by Elliot Associates, a New York-based hedge fund. It finances single-picture productions, such as 3:10 to Yuma, and also puts its own equity into deals: the company has backed Sony films and recently struck a deal to co-finance three-quarters of Universal Pictures' slate until 2015.
“If the deals make sense, the banks will continue to put money in,” says Mr Kavanaugh. “The banking markets are by no means completely shut down.”
His bullishness is shared by Ken Schapiro, managing principal of Qualia Capital, an investment firm that was lined up to provide the equity portion of Paramount's deal with Deustche Bank. “We are very interested in putting money to work in this sector,” says. “Film has been and will continue to be a strong-performing asset class.”
As the economy slows down, film becomes uniquely positioned, adds Mr Kavanaugh. “The film business is in a really good spot ... it's a cheap form of entertainment. People will always go to the movies.”