|
• Production Finance and Distribution Agreements
• Loan Agreements, Security and Priority Agreements
• Completion Guarantee documentation
• Insurance
• Sale and Leaseback, Refinancing
How a film or television programme will be financed depends
upon the type of production. Film and television programme
production falls into two basic categories:
(A) commissioned productions; and
(B) independent productions.
A. Commissioned Productions
A typical commissioner will be a film studio or a broadcaster.
The relationship between the parties is straightforward -
the producer produces and delivers the film, the commissioner
finances the film and arranges for its exploitation.
The commissioner takes the burden of finding finance and
distribution off the producer's shoulders. But if the commissioner
takes the responsibility, he will give the producer a lot
less freedom over the production. Thus, when the film is delivered,
unless the producer has enormous influence, his connection
with the film ceases except that he will be the accredited
producer. He will probably receive a reasonable fee, but will
retain very little by way of net profits. The producer is
much more of a "hired hand".
Many producers prefer, or, more often, are stuck with the
more arduous independent route.
B. Independent Productions
These may be financed in a variety of ways and examples are
as follows:-
1. Pre-Sales
2. Co-Productions
3. Equity Investment
4. Bank Borrowing
5. Deferments
6. Other
1. Pre-Sales
These may be done direct by a producer, but more likely,
the producer will appoint a sales agent to do this on his/her
behalf.
A pre-sale is an arrangement whereby a producer in effect
sells the film rights (either right by right or territory
by territory) to a local distributor well before the film
has started. In exchange, the local distributor undertakes
to pay an advance when the film is delivered, for example,
one year from the date of the contract.
If the advance is only paid in full after delivery, a pre-sale
is of little use by itself, but it can be used to spring "cash-flow"
when used in conjunction with bank lending (see below). Often
however, in order to secure his position, a distributor may
pay between 10% and 20% of the advance on signature of the
contract, and then, in that instance, a pre-sale does provide
cash and is a form of financing document.
2. Co-productions
As the name implies, this is a production by two or more
producers. However, an official co-production (i.e one made
under a number of treaties between the United Kingdom Government
and the Government of a foreign country) is an accepted way
of maximising the value of a film in a particular territory.
Each film has a nationality which is dictated by, amongst
other things, where it is made, whether the producer was a
citizen, or a company registered and controlled from a particular
country, whether the majority of the labour cost was paid
to nationals or residents of that country, and so on. One
of the reasons for this is that many countries provide financial
aids for national films, or give favourable tax treatment
for investment in national films and these benefits are not
available to foreign films.
Clearly, a co-production between producers of different nationalities
using a mix of facilities and labour might cause the film
not to qualify for a particular nationality and thus to lose
relevant national aids or treatment in either country.
This is where the Treaties come in. In essence, Governments
agree that, provided the film is produced in accordance with
the relevant treaty, despite the fact that the film might
not have otherwise qualified as a national film of either
country, nevertheless, the film shall be treated as if it
did qualify.
If the national benefits are preserved, then, for instance,
an English co-producer can, in disposing of the distribution
rights for the other co-producer's territory, realise from
the other co-producers's territory not only the value of the
exploitation rights, but also the value of national benefits.
Currently, there are co-production treaties between the United
Kingdom and Australia, New Zealand, Canada, Norway, France,
Germany and Italy. Those govern what are called "bilateral
co-productions". There is also the European Convention
on Cinematographic Co-Production between the majority of the
countries of the European Union which governs multi-lateral
co-productions, i.e. where more than two co-producers of different
nationalities are involved.
Application is made by each producer to its relevant competent
authority (in the UK, the Department for Culture, Media and
Sport) and conditional approval of the film is given; if the
film is produced in accordance with that approval, then the
film is likely to get final approval as a co-production film.
3. Equity Investment
An equity investor is a limited recourse lender. It lends
money to be used in meeting the cost of production of the
film, but its only recourse against the producer for repayment
of the borrowing is to the film's revenues. If the film makes
no revenues because it is a failure, the investor will lose
all its money; such investor thus takes a substantial risk
in investing.
In exchange for that risk, the investor obtains what is called
an equity position in the film, i.e. it will be entitled not
only to recoupment of its investment but also to a substantial
share of net profits of the film.
In many ways, equity investments are ideal for the independent
producer. They are a form of soft borrowing which does not
have to be repaid unless there are sufficient film revenues
to repay.
Examples of equity investors in England are the newly formed
Films Council (which applies monies from the National Lottery
to meet the cost of film production), British Screen, BBC
and Channel 4.
4. Bank Borrowing
Some banks specialise in lending money for the production
of films.
However, a bank will very rarely be an equity investor in
a film. What these banks will frequently do is to lend against
a specific asset, such as the undertaking of a distributor
to pay an advance when the film is delivered to that distributor.
What differentiates this lending from equity lending is among
other things:-
(a) the risk that the bank takes is not on the performance
of the film; the bank is paid out of a specific cash sum.
It therefore knows that provided the film is delivered, its
loan will be repaid;
(b) one risk that the bank does take is whether or not the
film is delivered to the distributor thus springing the advance
and it will obtain a completion guarantee from a third party
that that will happen. See further below.
(c) another risk is the creditworthiness of the distributor,
and the bank will take substantial due diligence steps to
close off that risk.
5. Deferments
Some of the senior personnel in a film (such as the producer,
director, leading artist etc) may be persuaded to take some
of their usual fee in cash out of the budget and to defer
the balance, i.e. to receive it out of revenues, once the
revenues of the film have exceeded the cash cost of production.
The deferor takes the substantial risk that that will never
happen and may well end up working for less than his usual
fee.
6. Other
• presales of music, merchandising and novelisation rights
• product placement
• grants
• tax based financing e.g. "sale and leaseback"
FINANCING DOCUMENTS
The financing aspect of these documents are highly technical.
However, the bulk of the financing documents mentioned above
are to do with the control of production or (particularly
in the case of a major pre-sale agreement) with the handling
of distribution. These aspects are dealt with under Production
Agreement and Exploitation Agreements [below].
The financing aspects covered by most financing agreements
includes:
1. Cashflow: i.e. when and how advances are drawn down.
2. Security: Equity investors and banks almost always require
security for repayment of their loans in the form of a legal
charge or mortgage over the producer's entire rights in the
film. Where there are numerous secured lenders, they will
have to agree the priority between their charges and how they
will act if their security becomes at risk.
3. Completion Guarantee: Equity investors and banks will
require a reputable third party to guarantee for a fee (which
is included in the budget) that the film will be completed
and delivered, and to undertake that, if the film goes over
budget, it will advance all sums necessary to ensure completion
and delivery.
The Completion Guarantor will take a high degree of control
over the producer's activities - see Production Agreement.
Producers normally have no interest in the benefit of the
guarantee.
|
