Hollywood pays dearly for new finance

By Ronald Grover, Michael White

Even the producers of the Twilight series are paying top dollar. Photo / Supplied
Even the producers of the Twilight series are paying top dollar. Photo / Supplied

Wall Street money is flowing to Hollywood again after three years of decline, paying for new production and purchases of the legendary film libraries of Metro-Goldwyn-Mayer Studios and Miramax.

The money isn't cheap. MGM is paying 6.5 per cent and the group that bought Miramax, including Colony Capital owner Tom Barrack, is paying 7.75 per cent for six-year senior loans, versus an average 5.6 per cent for comparable borrowers three years ago.

The rates partly reflect the changing cast of characters willing to hold loans.

Bank funds available to small studios and private equity have shrunk to about US$250 million ($330 million) from US$1 billion, said Clark Hallren, a former JPMorgan Chase executive whose Clear Scope Partners advises film companies.

That has forced borrowers to market loans to hedge funds, mutual funds and others demanding higher returns, he said.

"The market was hit by a double whammy," said Amir Malin, managing principal of Qualia Capital, a New York-based hedge fund that invests in entertainment. "Toxic deals were getting exposed and the number of banks actively participating in film financing were exiting in droves."

The number of banks doing business in Hollywood has shrunk to less than a dozen from as many as 30 three years ago, said Hallren. Many, including most foreign banks, pulled back after loans to MGM and TV producer RHI Entertainment soured and the companies filed for Chapter 11 bankruptcy.

The most recent transactions involved corporate financing, rather than so-called slate deals, or dedicated funds designed to invest in a specific selection of movie projects, according to Peter Hoffman, a partner in GHL in New York, which advises studios on funding.

Summit Entertainment, producer of the Twilight vampire films, is seeking to raise US$800 million and negotiating to pay lenders about 5.25 to 5.5 percentage points more than the London interbank offered rate for the US$600 million, seven-year secured term-loan portion, according to data compiled by Bloomberg. JPMorgan and UBS are arranging the credit.

Libor is the rate banks charge each other for loans, with corporate borrowers paying more. In recent years, investors have demanded a so-called Libor floor to protect against record low levels as the US Federal Reserve's efforts to stimulate the economy drove Libor down to 0.31 per cent as of February 10.

For Summit, Libor will have a floor of 1.5 per cent, making the loan rate as high as 7 per cent for the closely held studio based in Santa Monica, California. That compares with an average of 5.62 rate for a comparable loan three years ago, according to Standard & Poor's Leveraged Commentary and Data.

The company plans to use the proceeds to refinance debt, fund production and pay investors a dividend. Melissa Zukerman, an outside spokeswoman for Summit, declined to comment.

The new owners of Miramax, producer of the Oscar-winning films The English Patient and Shakespeare in Love, obtained US$325 million in December in a six-year, first-lien loan to complete the purchase from Walt Disney.

Priced at 6 percentage points above Libor, plus a 1.75 per cent floor, the loan carries a minimum rate of 7.75 per cent. An US$83 million second-lien loan has a margin of 11 percentage points and a 2 per cent floor, Bloomberg data show.

"There is not any sort of a punitive rate," said Hoffman, who previously worked at Goldman Sachs. "It's giving the entertainment companies good access to financing."

With the 2008 credit crisis, the weakening market for DVDs has reduced access to capital.

"The reduction in the value of film libraries caused by the decline in the DVD business has made commercial banks less willing to lend against libraries," said Stephen Prough, a founder of Salem Partners, a Los Angeles investment banking boutique focused on media and entertainment.

"Four or five years ago, banks were lending amounts up to 60 per cent of a production company's library value. Today, that rate is closer to 25 per cent to 30 per cent."

According to Prough, investors are willing to finance deals where they have confidence in future cash flow or "ultimates", whether it's the next instalment of James Bond or the final film of the Twilight series.

Prough said: "The deals that are getting done are those where producers can show lenders a piece of paper with studio 'ultimates'."

- BLOOMBERG

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