How recession proof is the industry?

Money is available, but financial crisis forces creativity

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BERLIN -- The film industry habitually trades in fantasy, but the current global economic crisis means a sudden reality check, notably on whether the sector really is recession proof.

With credit tighter than a Jason Bourne action sequence, the presale market -- especially to the U.S. -- is tougher than ever, and equity investors now a rare breed, financing films in the current climate might require new approaches.

This topic will be tackled by a panel of experts in a debate hosted by The Hollywood Reporter, together with the European Film Market and Commerzbank, at 5 p.m. Saturday at the Gropius Mirror Restaurant opposite the Martin-Gropius-Bau.

"All the classic financing models are gone, kaput," said Helge Sasse, CEO of German producer/distributor Senator Film.

The financial crisis almost capsized Senator, but having come out of a painful corporate restructuring, Sasse is surprisingly optimistic about the future of film financing.

"There is very little bank liquidity out there right now, but that is just a small portion of the total liquidity in the market," Sasse said. "We are developing new models for investors who are looking to reposition themselves in the market. The entertainment business, as a relatively crisis-resistant industry, is still a very interesting investment. Senator plans to present its new models providing a better mix of low and higher risk to potential investors later this year."

So how did movies go from being seen as an attractive decorrelated asset to a sector investors see as underperforming, if not downright risky?

"What's happened is that financiers of all hues have given us too much money," said Vincent Grimond, finance chief of Paris-based sales outfit Wild Bunch. "It has perverted the system. Private equity funds, rich individuals, hedge funds, banks, everyone piled in.

"What do producers do when they have that much money? They spend it making films. And there are two possibilities: Either they make more films, or bigger-budget films. So the overall result is far too many films and far too expensive."

The corollary of which is, unsurprisingly, smaller margins.

Grimond foresees a correction in the marketplace to bring things back to an even keel. "As an industry, we can't just carry on as before or we'll all go to the wall," he said. "The only thing that can happen is for there to be fewer companies, fewer films, and we will definitely have to make them for less money. I don't see how we can do otherwise."

Simon Fawcett, managing director of U.K. entertainment financiers Aramid Capital Partners, concurs. "Producers will have to become more realistic about production budgets to accommodate the drop in sales values," he said. Fawcett also notes that several banks traditionally associated with film funding have pulled back from loan financing, citing Bank of Ireland, Societe Generale and Nataxis.

Another leading London production company CEO told THR that one of the biggest problems are so-called "liquidity levies." He said that borrowing money from banks has become "almost too expensive to contemplate" because any institutions still lending have ramped up interest rate charges. "There are hardly any sources out there anymore and the cost of cash is so high it is definitely impacting on movies being greenlit," he said.

Olivier Aknin, founding partner of French film financing agency Backup Films, said he detects a palpable hesitancy and pessimism in the marketplace that is not propitious for taking risks.

"The major groups are cutting back overheads and asking their subsidiaries to do the same to limit risk," Aknin said. "I know of several European films on which U.S. studios were poised to make a commitment for distribution or production, and now they've got instructions from L.A. to pull out. Everything's frozen. As for raising funds, we can observe that things are more fragile, it takes longer, but it doesn't mean there's no money available. There still is money, but you have to work harder to raise it."

So as Wall Street and European capital markets pull up the drawbridge, film studios and independent production companies are pinning their hopes on more exotic sources of capital. Slate deals backed by Indian moguls, Chinese investors or Middle East potentates are in vogue, such as the one Brett Ratner's Rat Entertainment struck with Mumbai-based Reliance Big Entertainment this week.

"There's a lot of hype about India and China," said Patrick Russo, founder and principal of L.A. entertainment consultants the Salter Group. "But I'm doubtful these new sources will have the capital or the consistency to provide the kind of money we've seen in the last four years."

Russo does not buy the doomsday scenarios of some in the industry, arguing that the fundamentals of the entertainment business remain strong. But he does think that many in the business are vulnerable to a downturn.

"The indie distribution business in Europe, which is largely funded through bank financing, could be in trouble. How they are going to pay for it now that the banks aren't lending?" he said. "But the industry will survive. People look at the drop in DVD sell-through figures from last quarter and say, 'Oh my God, we're going off a cliff!' But look at the boxoffice. People went to the movies in December in a big way, and they're going to the movies now."

Wild Bunch's Grimond also shares a belief in the fundamentals of the sector, while acknowledging that profound change is on the way. "A film asset is still a good asset," he said. "It's a good business, but it's a business that is going to change in colossal proportions."

Scott Roxborough contributed to this report.