Film financiers predict years of tight credit

Global financial meltdown affects AFM confab

The bad news is that the ongoing credit crisis is going to make it harder to assemble film financing, which will result in fewer movies coming to market. The good news is that the ongoing credit crisis is going to make it harder to assemble film financing, which will result in fewer movies coming to market.

While the increasingly grim global financial meltdown hangs like a black cloud over this year's American Film Market, participants at the annual AFM Finance Conference, held Friday at the Fairmont Hotel in Santa Monica, still saw a few silver clouds -- albeit on a fairly distant horizon.

Predicting that the industry may be facing five years of tight credit, David Molner, managing director of Beverly Hills-based Screen Capital International, which specializes in setting up film financing, said, "five years of tight credit changes the way things work."

Ticking off the trouble spots -- a de facto strike that has slowed down film production, weak presales, investors growing disenchanted with their Hollywood investments -- P. John Burke of Akin Gump Strauss Hauer & Feld, pointed to "the brighter side": Talent that has become increasingly entreprenurial; the promise that in the future video-on-demand "may actually be worth something"; the spread of digital cinema, which will set the stage for the growth of digital 3-D.

Before that brighter future comes to pass, though, many companies and many more film projects are expected to fall by the wayside. But the thinning of the herd should produce an upside.

After a product glut, fueled by a couple of years of equity investment rushing into Hollywood, Molnar forsees "a contraction in the film supply." Once fewer films are getting made, then foreign rights will become worth more, and talent, facing the reality of fewer jobs, may be willing to settle for smaller paydays.

While the credit crunch is going to create its share of headaches -- one fear is that buyers will want to renegotiate those pre-sales contracts they've already signed -- it could also be an antedote for the problems resulting from the tidal wave of investment money, as much as $18 billion by one estimate, that triggered the film shooting spree.

As Lee Solomon, COO of the Weinstein Co., pointed out, as many as five to seven wide releases open in the U.S. on some weekends. "It is harder and harder to gross $100 million on a picture. It's harder and harder to open a picture and do $20 million," he said. Bottom line: "You have too many films in the market place."

Agreeing, The Film Dept. CEO Mark Gill upped the ante, observing that if you add in the limited release of speciality films and indies, the number of new movies fighting for attention each weekend in cities like New York and Los Angeles can climb to 12-13, and "all the little ones are cannibalizing each other, too."

"Effectively, there has been a dislocation of supply and demand," said Paul Hanson, QED International COO, with "too many movies."

The effects of the product glut can also be seen in the pre-sales market.

"If you have theatrical-based product with stars, they sell," Solomon said, citing as an example the Weinstein Co.'s "Nine," the upcoming Broadway musical adaptation helmed by Rob Marshall and featuring a starry cast including Nicole Kidman and Daniel-Day Lewis. But go into the market with a pitch for a smaller, non-mainstream movie, and the cautious buyer is likely to respond, "I'll see it when it's finished."

While there's still plenty of demand for American product, Gill suggested that producers have to be smarter about focusing on movies tailored to audience tastes around the world. Forget making Westerns or American sports movies if you're expecting returns from overseas. Outside of the U.S., the U.K. and Australia, stars like Will Ferrell and Carell don't draw crowds. Best to stick to action/thrillers, romantic comedies and dramas.

Producers will also have to overcome other obstacles.

Both Molnar and Bryan LaCour, Union Bank of California senior vp, entertainment finance, agreed that slate financing is out of the picture. "Traditional lenders were never all that high on the slate senior facilities," LaCour said.

Producers looking to raise money to support P&A costs aren't going to find eager lenders either. Although Mark Amin, Lionsgate vice chairman, noted that as advertisers cut back their buys, the huge amounts that the industry spends on marketing even smaller movies could come down by 10%-15% since ad buys will become cheaper.

And as corporate parent companies force their film studios to cut back, other opportunties could present themselves. Because of recent belt-tightening and well as the uncertainty surrounding the SAG negotiations, Hollywood's production pipeline could fall short next year. "Warners and Univeral are the only two companies that have full slates for next year," Gill said. That, in turn, could create a demand for outside product.

But producers looking to whether the present storm are going to have to go back to basics when it comes to raising financing, P. Clark Hallren, managing director, JP Morgan Securities, cautioned. "The business plans that are going to get funded are going to more about blocking and tackling and doing business the old fashioned way," he said.