Star-Struck Bankers Return to Hollywood to Finance Movies – Bloomberg

When Jay Cohen sought funding for a
new independent film company, Wing and a Prayer Pictures, he had
bankers falling over themselves to finance it.

“We had seven banks call and offer us lines of credit,”
says Cohen, head of film financing and distribution at Gersh
Agency in Beverly Hills, California, and an executive producer
of the 1994 comedy “Swimming With Sharks.” “They had never
met anyone involved in the company,” he says.

From big banks like JPMorgan Chase & Co. (JPM) to billionaires
like John Paulson, investors are putting their money into movies
again after pulling back during the financial crisis, Bloomberg
Businessweek reports in its June 23 edition. Filmmakers are able
to borrow at the lowest rates since 2008, bankers say.

“There is a lot more activity than I have seen in a long
time,” says David Shaheen, head of JPMorgan’s entertainment
industries group in Los Angeles. “There is increased comfort in
the future of the business relative to a few years ago.”

The success of Netflix Inc. and other streaming services
has generated demand for content and brought in new revenue,
which in turn has helped offset falling DVD sales that hit
studio profits. Expanding international audiences, especially in
China, are also reassuring investors, says Lindsay Conner, co-chair of the entertainment and media practice at law firm
Manatt, Phelps & Phillips.

More Lenders

The number of banks serving Hollywood shrank during the
financial crisis, to eight from 30, Shaheen says. Now about 20
banks are financing movie and TV projects. JPMorgan, which has
been working with the studios since the 1920s, Comerica Inc. and
Union Bank NA have been joined by East West Bancorp Inc. and
OneWest Bank FSB, which is co-owned by George Soros, Paulson and
Steven Mnuchin, the bank’s chairman. Loan prices are down to
where they were before the financial crisis, said Jeff Colvin,
senior vice president and group manager at Comerica in Los
Angeles.

The cost of a bank loan to fund production today carries an
interest rate of about 3 percentage points above lending
benchmarks, plus additional fees that vary widely among the
banks and investment funds. Interest rates hovered around 4
percentage points over benchmark rates during the crisis,
bankers say.

Film financing is attractive to banks because it requires
some specialization, such as knowledge of production and
distribution, that commands higher fees, says Joseph Woolf, head
of media and entertainment at OneWest in Los Angeles. Now the
rush to invest in movie projects is driving down returns for
financial backers.

Cannes Deal

During the Cannes Film Festival in May, JPMorgan, OneWest
and SunTrust Banks Inc. said they would lend $450 million to
EuropaCorp, the European studio founded by Luc Besson, director
of “The Fifth Element,” in the largest-ever financing for a
non-U.S. film company. Gersh’s Cohen says Wing and a Prayer
Pictures attracted equity investors from Texas to Brunei.

Despite the glamour, not everyone is opening up their
wallets. In April, Sony Corp. struck a deal with Citigroup Inc.
and a unit of private-equity firm Lone Star Funds for a $200
million debt and equity facility, people familiar with the deal
say. Citigroup provided half of that, with a $100 million loan
to help finance a slate of as many as 15 pictures, including
“The Amazing Spider-Man 2” sequel released in May, say the
people, who asked not to be identified because the terms of the
deal are private. Sony has sought subsequent financing, they
say, though no deals are imminent. The studio was seeking $750
million, the New York Times reported in December.

Bad Returns

Financings for a slate of movies “are starting to crop up
more in everyday dialogue, and a number of potential deals are
being discussed,” says JPMorgan’s Shaheen. The challenge is
finding equity investors willing to risk their money on several
projects, he says.

Private-equity and hedge funds mostly stay away from the
business because of bad returns, says Amir Malin, managing
principal of Qualia Capital LLC, a New York media investment
company. Aramid Entertainment Fund Ltd., a film finance fund,
filed for Chapter 11 bankruptcy protection in June, a move
brought on by the cost of several lawsuits it had filed against
producers who defaulted on movie loans.

“When incentives of studios and co-financiers are not
aligned, we have little choice but to sit back and watch the
train wreck about to happen,” says Malin.

‘Safe Money’

Competition is fierce for lending to independent
filmmakers, which typically raise money on a film-by-film basis.
Distribution contracts, tax credits and rebates payable by
governments are good sources of collateral.

“It is seen as safe money,” says Lee McGuirk, a partner
at the law firm DLA Piper.

Meanwhile, there’s no shortage of wealthy individuals who
lend at low rates in exchange for receiving producing credits on
a film.

“There are more billionaires within 10 miles of where we
are sitting right now than there were on the planet 10 years
ago,” John Sloss, founder of Cinetic Media Inc., an advisory
firm, said at the Cannes Film Festival in May. “They like
hanging around the movie business.”

To contact the reporter on this story:
Anousha Sakoui in London at
asakoui@bloomberg.net

To contact the editors responsible for this story:
James Ellis at
jellis27@bloomberg.net
Dimitra Kessenides, Stephen West

Star-Struck Bankers Return to Hollywood to Finance Movies – Bloomberg}

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