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A Banker’s Perspective: Banks, Hedge Funds and New Distribution Platforms

Expert Witness: Kathryn Arnold
Adrian Ward is a smart, producer friendly banker who has been in the trenches of independent film financing for close to 20 years. Having started with the Lew Horwitz Organization, a stalwart in the indie film world of the 90’s, Adrian is now at Pacific Mercantile Bank. I sat down with Adrian to get a banker’s perspective on the industry landscape and where producers should be putting their energies.

Kathryn: Does your bank work with investors? What are their interests in the film business?

Adrian: The new economics of film financing usually means that we are working alongside an equity provider (investor) to jointly provide 100% of a film budget. Since the depression in 2008 (let’s call it what it really was) a number of investors have emerged but are generally more astute and sophisticated with how they deploy their capital. That means it’s tougher for Producers with lower quality product or who are not disciplined with their budgets, but it’s good news in the long term for the health of the industry.
Compared to years ago, the studios are all but gone from the indie space. Occasionally we see them picking up some foreign or domestic rights, but they have otherwise put all their eggs in the tent pole sequel/prequel/remake/remake again basket!

KA: Hedge funds and banks were quite involved in film financing several years ago, with studio film slates…is that still the case?

AW: The short answer is no but there are a few brave enough to have kept going. The surge of hedge funds disappeared as quickly as it started. I think they learned some hard lessons and moved on. It was the same experience for many banks. I think we’re down to less than a dozen that are still active. Less than that if you’re talking about just single picture financing and only 2 or 3 (my bank included) that will finance pre-sales, tax credits and gap. That’s part of the reason why Producers are looking at alternatives like crowd funding which is actually quite exciting.

KA: Speaking of crowd funding, is that becoming a legitimate form of film financing?

AW: With recent developments in crowd funding, particularly for VERONICA MARS, it is obvious that for projects with wide enough appeal to the correct demographic that crowd funding has become a legit source of funding for mainstream indie movies. In recent months more and more of these sorts of films are utilizing this very “democratic equity” and it is now part of the conversation with producers on a regular basis.

KA: Particularly filmmakers with a strong following or a property with an organic fan base. Back to the banks, what are they looking for when analyzing a film project or slate?

AW: The banks look at the Producer and the decisions they make when putting together a film. The biggest decision a Producer will make is which sales agent they retain to sell the film in both the international and domestic markets. The temptation is to give the film to the first company that says “yes,” but you need to be more discriminating and find the best possible company that fits the film. We look for a Producer to be disciplined in his/her budgeting and work hard at the front end of the process to keep above-the-line costs to a minimum. Also, be realistic about timing of the funding process and hire a good lawyer!

KA: Well said! Are banks’ expectations higher or lower than they were in years past?

AW: Ours are definitely higher. The economic problems around the world mean that pre-sales are tougher and if we’re providing gap we are a lot more conservative on the values we put on unsold rights. We are also more concerned about the reputational risk of working with people or companies that do not measure up. Some banks don’t seem to worry about that. We’d rather do fewer deals with higher quality Producers.

KA: How does the bank insure their loan is protected?

AW: It’s all about knowing the market and who you are ultimately lending against. My time is spent talking with the foreign buyers so that I’m as up to date as possible on the good, the bad and the ugly. Then, when we are analyzing advance rates on buyers or a gap position on a film, I can call on those relationships to determine the best position for the bank.

KA: Are there tiers within the foreign sales ranks? Are there A, B and C level sales companies?

AW: Yes. We call them Primary and Secondary territories. Primary territory buyers get the highest advance rates because they are usually larger companies, sometimes public companies, that we can get financial information on and/or they have excellent payment track records. Secondary territory buyers max out at 50% advance rate and in some cases are 0%.

KA: How are you seeing indie films getting financed these days?

AW: Every which way. Indie Producers are nothing if not resourceful and you really have to be. There’s no right way or wrong way – just getting it done and getting the film made is an achievement. How it works out financially is another story. Typically it’s a combination of a bank loan (senior debt) and equity, but there are many other sources of financing such as soft money, crowd funding, brand integration, etc.

KA: VOD/Streaming, is there a business model using these platforms that is bringing in significant revenue?

AW: Yes. It’s increasing all the time and will no doubt be the pre-eminent form of distribution at some point. There was a lag period between the DVD business faltering and when other platforms came on line and started generating significant revenues. We now see an upswing both in terms of the overall revenue, as well as indie films - not just the bigger movies - filling up the pipeline. There are some very good independent distributors out there who have cultivated excellent relationships with the new platforms, and that’s where indie filmmakers should look for revenues.

KA: How are Itunes and Netflix contributing to the financing model?

AW: In significant ways. Netflix particularly has revolutionized the distribution model and they are popping up on more and more indie film financing plans. The same goes for Itunes. We are now actively lending against Netflix contracts alone in a number of projects. In addition, distributors are aggregating Netflix contracts and using them to finance more acquisitions. It’s all good news for Producers.

KA: Love it when a banker says there is good news on the horizon for Producers. Thank you so much Adrian for your time.

ABOUT THE AUTHOR: Kathryn Arnold
Kathryn Arnold has over 15 years of hands on experience in the film production and distribution arenas. Having produced and/or directed over 6 feature films, Live streaming television, dozens of commercials, corporate videos and events, as well as working in both the studio and independent film environment, Ms. Arnold understands the inner workings of the entertainment industry, its hiring practices, business development and the economic complexities and nuances involved in a world that very few understand.

Ms. Arnold has been retained as an expert witness and consultant on over 2 dozen cases, with plaintiffs and defendants, providing expert testimony, reporting, consultation, financial forecasting and referrals for clients on cases regarding economic damages and loss of wages. Clients include Gibson, Dunn & Crutcher; Bowles & Verna LLP; Haynes & Boone; Shook, Hardy & Bacon, Dummit, Buchholz & Trapp; Hosp, Gilbert, Bergsten & Hough among others.

Copyright Kathryn Arnold

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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