Fall into the supergap

4:00 AM PST 10/31/2006 by Stephen Galloway, AP

No, it's not a new retail outlet -- it's the latest buzzword in the film-financing sector.

After years during which the word "gap" could be heard in the Loews Santa Monica Beach Hotel as frequently as "back end" is uttered at the Beverly Hills Hotel, a new expression is taking the independent film world by storm, an impressive designation that conjures images of caped bankers and highflying financiers. The word? Supergap.

To understand what supergap financing actually means, it's best to review the basic tenets of film finance. Most independent movies are cobbled together with funding from a number of sources. There is private equity, meaning a person or company that invests in the project. There are government subsidies and tax breaks, which come with their own terminology, such as "sale and leaseback" and "Section 48." And there are presales, where, before a movie is made, a producer sells the rights to various foreign distributors for a percentage of the film's budget.

After adding these together, there often is still a shortfall, which is commonly referred to as "gap." For instance, if a movie costs $10 million, it might have $4 million in equity, $1 million from tax breaks and $3 million in presales, leaving a $2 million gap. That gap usually is covered by a bank loan, and as with mortgages, a bank wants collateral, which it takes in the form of unsold rights -- assuming that future sales to Japan, or the U.K., or France or a host of other places will safeguard its loan. Most lenders expect those anticipated sales to cover about 120% of the cost of the movie, leaving a comfortable window in case sales fall short.

While this system works just fine for most movies, sometimes producers aren't able to procure enough funding; instead of needing 20% to fill the gap, a producer might need 30% or even 40% -- far more than a regular bank will provide. And that's where supergap comes in.

Supergap is simply another kind of loan, like gap financing, that covers the missing chunk of the budget. Because the majority of banks in the movie business will not risk providing more than 20% of a picture's cost without deals in place, some investors agree to put up the bit that's missing -- as a loan, not an investment -- calling it supergap.

Those investors include companies such as Grosvenor Park Media and New Bridge Film Capital. They tend to lend to productions that have the support of reliable sales agents like Summit Entertainment, knowing their sales estimates will be reliable. Supergap companies are plugging holes that have been created as banks choose to lend less and less.

"In 1997, you could get a gap as high as 50%," one banker says. "Imperial Bank, (BNP) Paribas -- whoever was doing gap would come in at a much higher number than today. But a few years later, that gap shrinks to 25% and then 20%, and some banks aren't doing any gap at all."

Among the banks that are providing gap loans, some now "discount" contracts, meaning that if a producer makes a sale to Kazakhstan worth a nominal $100,000, the bank will provide only a percentage of what the contract claims to be worth. (Most banks divide the world into primary and secondary territories, based on how reliable they are for collection.) This discounting can leave a movie with an even bigger hole to fill -- hence the need for more supergap money.

"Supergap has existed for about 10 years," says Lee Solomon, a principal at Grosvenor Park, which has backed films like the Weinstein Co.'s planned December release "Miss Potter" and New Line's upcoming "Love in the Time of Cholera." "But it has absolutely stepped up recently.

"There has been an influx of capital," he adds. "A lot of people are looking for different ways to get a return, and the best returns are in the supergap position. It is in a riskier position than bank gap, but a less-risky place than equity, so you get practically a mezzanine return."

Confused? What Solomon is referring to is the order in which loans and investments are paid back. "In the capital structure, 'senior debt' is the first to get paid," says Bennett Pozil, group manager of Natexis Banques Populaires, speaking of a bank's gap loans. "Plain old equity is the last to get paid. The supergap says, 'We will be behind the bank but in front of everyone else.'"
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