Capital Structure:
Financing films
Prof. P.V. Viswanath
EDHEC
June 2008
Equity Deals
 Equity Deals come in many sizes and shapes.
 A common one is a production-financingdistribution (PFD) deal, which is with a major
studio, usually.
 Independent Distributor Financing is similar to a
PFD deal, except in this case the distributor is
not affiliated with a major studio.
 Another one is end-user financing.
 Finally, talent agencies can act as intermediaries
in obtaining equity financing for a package of
films.
PFD Agreement
 This includes Production-Financing and Distribution; it’s
also called a P-D or a Studio Development Production
Deal.
 The first phase is a "Development Deal Memo" between
the producer and the studio.
 The Development Deal Memo outlines the agreement,
salary, time schedules, screen credit, and percentage
points.
 A PFD is usually a step-deal – that is, compensation is
provided one step at a time, contingent on satisfactory
completion of a stage. The studio usually retains the
right to withdraw at any point in the development of a
film.
PFD Deals
 When a deal is signed, the director is paid a
small amount, to cover the period until the film is
either green-lighted or put in turn-around.
 If the film is green-lighted, the producer might be
paid the remainder of his compensation
according to a schedule.
 For example, 20% over preproduction, 60% over
principal photography (or production), 10% on
delivery of the first cut of the picture and 10% on
delivery of the film to the distributor.
 The producer may also get a cut of the gross or
net profit, depending upon his clout.
End-User Financing
 End-User financing is when a theater, cable or television
station will put up money in exchange for equity
percentage participation in the film's revenue stream for
specific markets.
 This is comparable to pre-sale financing, except that in
the latter approach, there may be no funds provided upfront.
 End-user financing can be obtained from several endusers.
 The foreign market may be another possibility to acquire
end-user financing. However, foreign entities may also
be willing to buy foreign rights outright.
Completion Funds
 Completion funds are designed to provide partial
production financing or post-production
financing.
 Usually completion funds are obtained when
principal photography has been completed but
the release of the film is held up because of lack
of funds to pay the lab or due to lack of funds to
complete post-production.
 Since the participation of the financier providing
completion funds is key, often he has to be paid
a larger percentage.
Gap/Supergap financing
 Gap/Supergap financing is a form of mezzanine debt
financing where the producer completes their film
finance package with a loan secured against the film's
unsold territories and rights.
 Gap (or supergap) loans are subordinate to the
senior/bank production loan, but in turn, the
gap/supergap loan will be senior to equity financiers.
 A gap loan becomes a supergap loan when it extends
beyond 10-15% of the production loan required to shoot
the film; usually a bank is unwilling to bear the risk
beyond 15% of the budget.
 Gap/Supergap lending is a very risky form of capital
investment and accordingly the fees and interest
charged reflect that level of risk.
Investor Financing
 Often a single wealthy investor or a group of investors may be
willing to finance a film. This may happen at the
development, pre-production or production stage.
 For example, in recent years, hedge funds have been
interested in financing picture deals.
 Often such a deal might be in the context of a limited
partnership, where the limited partner is not liable for budget
overruns and only risks the capital invested.
 Often limited partners are interested because of the tax
advantages.
 Expenses may be immediately deductible for tax purposes,
while taxes on profits may only have to be paid in the distant
future – this would be a way of maximizing the value of tax
deductions. This is comparable to a firm with high taxable
profits acquiring another firm with tax-loss carry-forwards.
Tax-Shelter Deals
 A number of counties have introduced legislation that has the effect
of generating enhanced tax deductions for producers or owners of
films.
 Schemes are created which effectively sell the enhanced tax
deductions to wealthy individuals with large tax liabilities.
 The individuals pay the producer a fee in order to obtain the tax
deductions.
 The individual will often become the legal owner of the film or certain
rights relating to the film, but the producer will in substance continue
as the real owner of the economic rights to exploit the film.
 For example, German tax-law used to allow investors to take an
instant tax deduction even on non-German productions and even if
the film has not yet gone into production.
 The film producers can sell the copyright to one of these tax shelters
for the cost of the film's budget, then have them lease it back for a
price around 90 % of the original cost.
Co-financing
 Co-financing partners share production and distribution
costs and agree to split future revenues.
 When Fox decided to make the movie Titanic, it asked
Paramount to put up $65 million to help finance the film
in exchange for a portion of profits and movie rights.
 Co-financing can be for one or several movies.
 Studios tend to co-finance if they are financially
constrained.
 Riskier movies tend to be co-financed, while less risky
pictures are financed in-house.
 Films tend to be co-financed if they are much riskier than
the usual films that the studio finances.
Co-financing
 When different films have to compete for scarce inhouse resources, riskier films often tend to get sidelined.
 Nobody wants to take them on because they have a
higher probability of being abandoned
 And if they do get abandoned, the individuals involved
bear a disproportionate amount of the cost, since they
don’t get credit for the time spent on the abandoned
movie.
 Hence, otherwise desirable movies don’t get made
because of the human capital considerations involved.
 Using co-financing in such cases ensures that enough
financing is provided because the studio as a whole
commits funding to the project – no one major has to
bear the costs of failure.
Problems with Outside Equity
 A big problem with outside equity – normally – is
information asymmetry.
 In the film industry, the problem is less
information asymmetry than lack of any
information – it’s very difficult to forecast film
revenues.
 The bigger problem with equity is the
expectation of artistic control. Hence producers
are always looking for investors how want to
have exposure to a new source of risk or to be
associated with a creative venture – without
artistic control.
Problems with Outside Equity
The availability of outside equity also
means that studios may not be able to
insist on artistic control if they want to
participate.
Consequently, studio compensation may
be more fee-based, rather than equity.
Actors themselves are also investing in the
equity of a film, these days.
Lender Financing and Outright Sales
In addition to obtaining equity financing, it
is also possible to finance pre-production
and production by selling part of the rights
to distribution or to other revenue streams.
Commitments to purchase such rights in
the future can also be used as the basis
for bank and other lender financing.
Negative Pickup Deal
 A negative pickup deal is a contract entered into by an
independent producer and a movie studio wherein the
studio agrees to purchase the movie from the producer
at a given date and for a fixed sum.
 Until then, the financing is up to the producer, who must
pay any additional costs if the film goes over-budget.
Superman and Never Say Never Again are examples of
negative pickups.
 However, once a negative pickup deal is signed, it is
easier to obtain financing for the production, since there
is already a buyer for the film. E.g., the pickup letter can
be used as collateral for borrowing from a bank.
 If there is no prior deal, but the film is offered to a
distributor after being produced, it’s called an acquisition.
Negative Pickup Deal
 Since the buyer has already committed to purchasing the film
in a negative pickup deal, the producer has a free hand,
subject only to satisfying his investors.
 This may result in the producer reducing the riskiness of the
film and the quality of the end-product as well.
 For example, in Terry Gilliam's Brazil, the producer, Arnon
Milchan, had a negative pickup from Universal Pictures. The
studio had creative disagreements with the director over
choice of star, content and duration, and failed to resolve
these issues to its satisfaction, because the negative pickup
had essentially granted Milchan final cut.
 The studios and distributors will contain this risk by offering
the negative pickup contract only to a production that has
financiers, a script, and key creative personnel, particularly
the director and stars.
Presale Financing Deals
 This is the funding of a film’s production costs
through the granting of a license for the film’s
rights by a producer to a distributor in a
particular media or territory before the
completion of a film.
 Presales can take the form of funds, guarantees,
or commitments.
 Even if the presale does not provide immediate
funds, it can be used as collateral for a loan,
similar to the negative pickup deal.
Completion Guarantee
 Banks and other investors are interested in ensuring that
the film is completed – without a completed film, there is
little chance of their recouping any of their investment.
 Furthermore, given the nature of pay-or-play contracts, if
a film is stopped midway, it may require a large
investment for it to be resumed.
 A completion guarantor is a company that agrees
 either to advance all sums required to complete payment of a
production cost of a picture if that cost exceeds the budget,
 or to repay the sums a financier has loaned or invested.
 The completion guarantor charges a fee that could be up
to 6% of the film’s budget.
Completion Guarantee
 A completion guarantor itself needs financial
backing. This is obtained by the insuring of the
completion guarantee.
 Financiers usually don’t have expertise in how a
film is made and what aspects of the film
production are likely to delay the completion of
the film or to cause it to exceed its budget.
 Completion guarantors are knowledgeable in
this respect and thus add value.
 The guarantor inspects the budget, script and
the shooting schedule to ensure that the film is
feasible.
Completion Guarantee
 The guarantor ensures that
 finance equal to the approved budget for the film is available
 all personnel - artistic and technical - are available for, and
indeed capable of, the making and completion of the film
 that insurance, studio and location arrangements are satisfactory
 that the documents to the acquisition of the basic story and/or
novel, the screenplay and the music in order to be sure that the
production company is entitled to make the film.
 that service agreements with the director and artists do not grant
rights which would seriously endanger the delivery of the film
 The guarantor closely monitors the shooting of the film
and receives daily shooting progress reports and regular
cost reports.
 It also monitors the post-production schedule until the
film is actually delivered to the distributor.