Roundtable: Financial fallout and the industry
VIDEO: Credit has disappeared. The economy is tanking. How will the film business ride out the recession? Our panel of experts has predictions.
Filmgoers can be forgiven for passing on a horror flick this Halloween -- the spills and chills in the financial markets are far scarier. With credit frozen and banks teetering, The Hollywood Reporter's Matthew Belloni gathered some of the most connected moneymen in town to debate the fallout for the film business. JPMorgan's John Miller is perhaps the most well-known Hollywood banker, working closely with David Shaheen, another JPMorgan entertainment specialist. Neil Sacker is president and COO of the Film Department, which in 2007 raised $200 million to finance and produce up to six films per year. Schuyler Moore is a film finance attorney at Stroock & Stroock & Lavan, who represents, among others, India's Reliance ADA Group in its recent funding of the new DreamWorks. And Mickey Mayerson, a film finance lawyer at Loeb & Loeb, has helped funnel billions of dollars into studio slates.
THR: What will the short-term effect be on the industry from the current turmoil?
John Miller: Obviously it's impossible to get credit right now. And even in our case, where JPMorgan has a very, very strong balance sheet, the problem we're faced with is not necessarily our ability to commit our balance sheet, but when we arrange these large financings we have to go syndicate them, and there's just no market right now to go out and sell paper. So I think it will have a very, very damaging effect short-term. Our view is that next year, things will start to ease up. But I think it's going to take awhile for this credit crisis to correct itself.
Mickey Mayerson: Although pipeline deals seem to be still getting finished. Once the pipeline is exhausted, then we're dealing with the problem of where the money's going to come from. But we haven't seen any of the financial institutions show any indications of their planning on backing away.
THR: How will the credit woes trickle down to the production side?
Neil Sacker: We've looked to do some additional things with (the Film Department), and we are pretty confident that we can get the (mezzanine debt) right now. But part of that is we actually have a track record. We can show this picture, that picture, this development slate and all that. But as a startup -- God knows what it would be like if we ever tried to redo what we did two years ago. We wouldn't be successful.
Mayerson: But this is in contrast to the single-picture market, which has typically not been populated by a syndication of banks. Often it's a single financial institution or now a single financial institution with some type of mezz player supporting it. That is a totally different business, and it's not being affected by a lot of these market forces. That is more affected by entertainment market forces, (like) what is happening in the domestic marketplace for the acquisition of movies, the strength of the foreign marketplace in buying movies, and the (value of) paper that's coming out of the international marketplace. That's a different marketplace that seems to be, in my opinion, fairly insulated from a lot of the hurricanes that are hitting the financial markets.
THR: Part of this $700 billion federal bailout includes an amendment to the tax code that could boost the industry. What's the change?
Schuyler Moore: What they did is amend Section 181, which used to provide an all-or-nothing deduction for the production costs of a film if the film was produced in the U.S. and cost less than $15 million. Under the amendment, now you get to deduct the first $15 million no matter how much the film costs, so it eliminates the problem of participations and residuals throwing you over the prior $15 million cost limit. Unfortunately, Section 181 does not work on its own to generate financing, unlike a tax credit. All that happens is you deduct now and you get the income a year later. So it's a one-year deferral, which is nothing to write home about. You have to monetize it with counterparties that are willing to take an aggressive tax position, and those used to be the banks, but the banks no longer need the tax deductions.
THR: Is the bailout going to help deals get done?
Miller: It should help. It doesn't necessarily have a big impact on us because our CEO has been saying for the last four or five years that we've got to create a focused balance sheet, and he's done that. JPMorgan is in an incredibly strong position. But banks don't trust each other. What the bailout will do is take banks, hopefully, that are on the edge and will move a lot of their crummy loans off their balance sheet to somewhere else to free up capital and let them start lending.
THR: What timeline do you see for the effect to occur?
Miller: Probably sometime next year, banks will start to free up capital.
THR: The perception is the film business has been more resilient in depressionary times. Will this still be true?
Miller: I agree with that point. But I believe studios are going to have a harder time as a whole attracting capital.
Mayerson: Just when you consider (the studios') real estate assets, they have devalued substantially in the last 12 months. Of the entertainment assets, they have the same value as they did 12 months ago. But we as an industry want to continue to make it more attractive to financial investors -- whether it's the studios making deals with financial institutions on better terms, whether it's the cost of production going down, the cost of distribution going down, exercising greater controls on the deployment of capital. The financial institutions that have been investing in our industry in the last five years have become increasingly sophisticated and more aware of the shortcomings of the early deals.
THR: You seem to be saying that terms may change but the deals are still going to happen. What if Warner Bros. goes looking for a billion dollars next time and it's not there?
Miller: I personally don't think it is there. I think that today they wouldn't be able to do that. Paramount's deal with Deutsche (Bank) failed. They are going to be reliant on independents bringing product to them or co-financing with other studios or independents or going to Mother Viacom for capital.
Moore: There is actually still slate financing. I am doing one for a studio, but (the investors) are now demanding much better terms. That whole world has changed.
THR: How do you think this turmoil will affect the price of films at AFM?
Sacker: When the dollar was weak, we all said, "Oh, the prices will double." That didn't happen. They solidified, but they didn't double. Now that the dollar is getting stronger, we're actually expecting it'll get tougher out there. I think it'll be a tough AFM.
Miller: I would agree. Everyone is hoarding cash. So unless it's a must-buy, my guess is the buyers are going to be very selective.
THR: Where is the next dumb money coming from?
Miller: I don't see a clear next dumb money. We've been through the German tax deals, the insurance companies, the high-net-worth individuals ... I think most of the deals for the hedge funds and private equity firms were not very good for them. I think Dune did a very good job with Fox, but part of that was that Fox had a great slate. And there was no cherry-picking. They got sequels, they got animation, they got whatever Fox was investing in. Most of those transactions have not worked out. There were a lot of movies made that shouldn't have got made but did because there was enough liquidity in the system. I just think it'll be a while until the next dumb money shows up.
Mayerson: But if we had sat here five or six years ago, when the insurance companies went down, none of us would have predicted that hedge funds or major investment banks (would invest in the film business). We never would have predicted that states would be enacting the types of subsidy programs that are now with us. The good news is that every time we get to this point there has always been another source of it.
Moore: It's not dumb money; it's money. Two waves that I think are coming and why: The first wave is India. One, they all speak English. That is their primary language. Two, they completely get the entertainment business because of Bollywood. Third, they have a very strong economy. Fourth, they really want to move out on a worldwide stage. It's more than economics. It's political. It's about pride. Reliance moving into the DreamWorks transaction -- it's part of a worldwide strategy. I represent a number of Indian companies, including Reliance, and I see there's a number of them that are doing the exact same move. It's not about Bollywood, it's about English-language, mainstream movies for a worldwide audience -- and they don't want or care about acquiring the Indian rights to those films. They're here for the big play. And behind India, the next one is China. It starts in Hong Kong. Again, they speak English, have an entertainment business, have money. China alone could cash in U.S. debts and buy Hollywood. Their currency has been strengthening over time. And we look cheap, and we are.
THR: Do you guys get a general sense in the business that the party days are over?
Moore: I'm going to give you a prediction: I think we will see several significant bankruptcies.
Miller: It sounds like I'm Darth Vader walking through the halls here, but the movie business needs to reinvent itself to a certain extent.
THR: Let's say the economy deteriorates further. What's the worst-case scenario for the business?
Miller: I don't think we'll get to a depression, personally. I think we just have to get through this election, get through the year-end, and start very slowly and gradually to improve some of the problems. And I think there's enough financial support in this business from people that are committed to this industry. If the capital's not there, you can just do fewer films and slow down production and lower overhead and lower development. This is an industry that can adapt to a tighter credit line.
Mayerson: There's also going to be wealthy individuals who continue to come to the industry for a whole host of reasons -- other forms of capital than just Wall Street capital.
David Shaheen: And we're seeing that. Frankly, if you are in that position where you've got the capitalization to take advantage of, there's actually quite a lot of opportunity.
Miller: We have three huge deals that are ready to go, and we're trying to decide whether we wait and take them out in the first quarter or start to market them now for January. It's just very troublesome. I think it's going to be real rocky, a lot of white water over the next three to six months.
Moore: But we have lived through so much stuff, where everything was just so dark and looked so hopeless. And we've been supported every single time from some source we've never expected. Who knows from where, but more money is coming. No question about it.