Financing major motion pictures has always been something of a crapshoot. Big-budget projects can fast become box-office busts; cheap indie flicks often turn into surprise moneymakers. Now Hollywood is looking to take a bit of the risk out of the equation by tapping the capital markets to bankroll multiple movies at once.
Over the past 18 months, studios have raised some $4.5 billion in film securitizations and structured financings, according to Merrill Lynch & Co. In such deals a production company typically issues a mix of debt and equity securities backed by the future income of a basket of films to be produced over a set number of years. The studio earns a distribution fee on each film but pays a portion of the revenues out to the bondholders as interest. Equity holders get whatever cash is left after production, marketing and debt-service costs. The studio usually retains an option to buy back investors’ interest at maturity but loses the rights to the films if revenues don’t cover the debt repayments. (Consequently, studios often execute these deals through separate legal entities that are created solely to house the rights to the films in question.)
Studios have attempted similar deals in the past but without as much success. The difference now is that they are offering ownership of the films to investors rather than merely borrowing money. These equity tranches — which Merrill estimates can return in excess of 20 percent annually — are attracting hedge funds and leveraged-buyout shops.
“Hedge funds and private equity firms are approaching us,” says Robert Osher, chief operating officer of Sony Pictures Entertainment’s Columbia Pictures unit.
Last month, for instance, Viacom subsidiary Paramount Motion Picture Group raised $300 million from investors to produce at least 30 films. That deal also gave investors exposure to the future profits of a small number of existing Paramount films, including Jackass Number Two and Nacho Libre. Also last month, production company Dark Castle Entertainment scored $220 million for up to 15 films from a syndicate led by CIT Group. From 1995 to 2003 there were nine film securitizations, according to Merrill. Since 2004 there have been ten. Bankers, investors and studio executives see the pace increasing.
Investors have come knocking at an opportune moment for Hollywood. The average cost of producing and marketing a major movie spiraled from $54.8 million in 1998 to $96.2 million last year, according to the Motion Picture Association of America. Last year Universal Studios, a subsidiary of General Electric Co., spent a record $207 million to put out its remake of the classic King Kong. Raising money from institutional investors allows studios to spread their own cash over a larger number of films.
“The studios are looking to manage risk, especially now that they are a part of larger conglomerates,” explains Laura Fazio, head of media investment banking for the Americas at Dresdner Kleinwort, which advised Paramount on its deal.
Wall Street senses an opportunity to apply the film financing structure to other media and intellectual property. One possibility is the music business. In 1997 rock musician David Bowie famously issued “Bowie Bonds” to securitize future earnings from his existing recordings, but a music label has never used such a structure to finance records that have yet to be made. Some record companies are looking into the prospect, bankers say, but no deals are in the pipeline. Other potential applications run the gamut from video games, a $10.5 billion-a-year industry, to prescription drugs, a market whose R&D costs are soaring.
“This technique could be used for music and television,” among other products, says Fazio. “Wherever a diverse portfolio can be created.”
