Wall Street Bullish on Films Again

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The new economics of film financing come with diminished expectations, different deal structures but still lots of money.

Wall Street and its bankers and hedge funders helped raise $15 billion from 2004 to 2008 to finance slates of studio films. The action was so fast, it had some in the industry worried about a glut of product brought on by an unsustainable appetite for investment in the next blockbuster. Sure enough, the economy blew up, and Hollywood's money bubble popped, at least for a couple of years. Hardly time enough to miss it, it turns out, because big investors have returned with such a vengeance that some in the industry are talking about the possibility another bubble is already inflating.

Insiders say Legendary Pictures is busy raising $600 million to $900 million to finance movies through 2016. Plus, as many as three more entities, including possibly two that are new to Hollywood, are trying to raise more than $1 billion in aggregate.

"Our firm is currently active on a couple of deals that will get done or have a realistic chance of getting done, and that's great to see after a couple of years of light activity in this area," says Robert Darwell of the law firm Sheppard Mullin.

An event called the Film Finance Forum scheduled for September in New York advertises that "traditional investors and new equity financiers are investing in Hollywood once again."

Is it all too much, too soon after the fall?

"The real concern is if the market will overheat and get ahead of itself," one longtime film financier told The Hollywood Reporter on the condition of anonymity.

All of the sudden secretive and not-so-secretive activity comes on the heels of some major deals: Summit, courtesy of its Twilight success, was able to raise another $750 million in a transaction that closed in March. Filmyard Holdings purchased Miramax for $663 million in a deal led by Ronald Tutor and his Colony Capital in December, the same month MGM emerged from bankruptcy with $500 million from various sources. A few months before that, David Ellison raised $350 million for his Skydance Productions, some of which was used to produce True Grit.

"The combination of new entrants like Colony and the institutional support for Summit and MGM's recent facilities is a clear indication of the capital market's positive view of the long-term value of filmed entertainment," says Patrick Russo, a principal at the Salter Group.

That big money has been flowing into Hollywood again after a hiatus isn't surprising given that smart deals can easily bring double-digit returns, sometimes over a long period as ancillary revenue kicks in, and can be an effective -- and exotic -- way to diversify a portfolio. Boffo box office in 2008 and 2009 also reignited interest in the movie business.

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"There's interest again from institutional and strategic investors," says Laura Fazio, managing principal at Twin Oaks Advisors. "We're getting a lot of inquiries. Film as an asset class is still attractive. You can get a good yield."

Even the finance deals that went sour along with real estate investments and bank failures weren't as bad as they appeared, in part because of money generated from DVD sales, Internet streaming and TV rights once even mediocre films left theaters.

"Everybody loves to shoot darts at everyone, but the beauty of this asset class is you have a long revenue stream," Fazio says.

What's different this time -- and will likely keep things from getting bubbly again -- are diminished expectations (DVD sales are weaker, for example) and that the relatively small number of senior lenders still standing after the economic swoon are exacting more stringent terms.

"New studio slate deals are being discussed but have to be structured in a fundamentally different way than the earlier deals since the big banks are no longer willing to take box-office risk on unreleased pictures," says Isaac Palmer, managing director at advisement firm MESA.

"They will, however, make loans against the ultimates of released pictures," he adds. "This means that the new deals require more equity than before as there is no guarantee that the first few films will be successful enough for the fund to get to the point where the loans can be drawn."

Like the massive studio slate deals, money is also easier to come by (relatively speaking) for independent films than it was a few years ago. The mechanics of debt and equity financing, gap and supergap funding and tax incentives haven't changed much, but the terms have. Banks aren't lending against presales like they used to, for example.

"It's harder than it was five years ago but easier than it was two years ago," Palmer says. "It's tougher to get a loan, and the amount they're willing to loan is less."

Not everyone is convinced of the all-clear signal, though. One major overhang exists: Debt-to-equity leverage that was 6-1 in the heyday is now 1-1, which makes it a lot more expensive to invest in movies.

"There's no evidence that things are getting frothy," one film-finance attorney says.           

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