Member Article

The role that Asian banks will play in film financing in Asia is a challenging and necessary one as we continue to see the fast paced growth of the Asian film industries. Asia is, so far, an untapped resource of ideas, stories, shooting locations, skilled crew, talent and effective film making techniques. This growth has given rise to more and more opportunities for cooperation and exchange of ideas between Asian partners and their western counterparts, and more sophisticated financial and legal models are being adopted when structuring international co-productions. Ownership of rights and chain of title issues are more carefully addressed at the outset and properly documented.

Whilst traditional forms of equity financing together with some assistance from limited government grant programs (for example, HK’s Film Development Fund and the Arts Development Council and Film Guarantee Fund) continue to be the staple resources for financing films in Asia, alternative funding options through a bank could see Asian banks play a key role in the growth of the infrastructure of the film industry as a whole in Asia. We have already seen over the last several years Asian films financed by US and European banks. For example Michelle Yeoh’s “The Touch” and “Silver Hawk”; Tsui Hark’s “Era of Vampires”; Zhang Yimou’s “Hero” and “House of Flying Daggers”. Given the right conditions and considerations, these films could have all been financed through banks in Asia.

THE BASIS OF LENDING

The bank lends on the basis that it will be repaid in full without any unreasonable risks and to make some money on its capital. In keeping with this practical approach, the bank will always be the last to put in its money and the first to be repaid. It will surround itself with the appropriate advisors and professionals such as the sales agent, the risk analyst/manager, the completion guarantor and its lawyers. All of these people play key and important roles in helping the bank decide whether or not to lend money for a particular film production.

HOW BANKS CAN PARTICIPATE

Generally, there are two basic ways in which a bank in Asia could participate in financing film production: (a) discounting of distribution contracts and (b) gap financing.

(a) Discounting Distribution Contracts
In discounting, the bank will undertake to finance a film production against existing distribution contracts entered into by the producer. A producer may enter into a distribution contract to license certain rights for a film prior to the film being made. In consideration of these rights, the distributor will pay an agreed sum of money or “distribution advance”. This distribution advance will be paid only when the completed film is delivered to the distributor or in agreed instalments over the period of production with last payment upon delivery of the completed film.

Since payments from the distributor are made in instalments and upon delivery of the film, the producer may be faced with the dilemma of not having the cashflow to actually make the film. Under these circumstances, the producer may seek the bank’s assistance. Depending on the bank’s assessment of the acceptability of the distribution contracts as collateral, the bank may lend against these distribution advances. In return, the bank will want the right to collect directly from the distributor the distribution advance as and when due and payable.

Effectively, the bank is cashflowing the producer’s cost of production against the presales contracts. As security, the producer will assign to the bank the right to receive the distribution advances payable under the distribution agreements. By virtue of this assignment, the distributor will now make scheduled payments of the distribution advance to the bank directly instead of to the producer.

(b) Gap Financing
The distributor’s decision to pre-buy a film will be made on the basis of the material existing at the time for example, a script in final form, details of the principal actors or actresses and director attached to the project. In the past, a producer may have been able to finance the entire film based on presales. This however is generally no longer the case.

Where the budget of the film is not met by any presale contracts, producers would be looking to banks to finance the “gap” and lend against the value of the unsold rights to the film. Typically, banks would be prepared to gap finance no more than 20% of the budget of the film provided they are satisfied as to the commercial value of the film based on sales estimates provided by the sales agent. Banks will require at least 2 times the amount of sales estimates to cover the gap. In other words, if the gap required is, say, US$1 million, the sales estimates must be at least US$2 million.

The bank will have to be confident that sales on the unsold rights of the film will be made after the film is completed. They might also want to see that some pre-sales contracts are in place since this would indicate not only the marketability of the film but also that the sales estimates given by the sales agent are accurate.

KEY PEOPLE IN A TYPICAL DEAL

(a) Risk Analyst/Manager
The bank may work with a specialised and experienced risk analyst/manager to help the bank assess and/or manage the risk of the project. Generally, the risk analyst plays a pivotal role in that she will be the first “gatekeeper” of the bank. She will review and assess the project, and advise the bank if the project is a good or bad risk. Once a project is accepted for financing, the risk manager takes over to manage the risk as far as she can, right up to the point of repayment. The risk analyst will consider all artistic and creative elements of the project, read scripts, liaise with directors and producers, work closely with the sales agent on the sales estimates and consider the project’s exploitation potential and commercial returns etc. Risk managers will work with the bank to scrutinize production and cashflow schedules, budgets and script, review daily production reports and weekly cost statements and monitor delivery. They will also (in close consultation with the bank) have approval rights over sales which are below the minimum sales estimates. The risk analyst and risk manager may or may not be the same person.

(b) Sales Agent
The function of the sales agent is to essentially fully exploit the film and to achieve the maximum possible commercial returns. They will seek to get maximum exposure and publicity for the film at film festivals and markets, and in so doing will also find the best territorial distributors throughout the world for the film. Producers who have limited or no experience and resources in exploiting their film will usually seek the help of the sales agent. The major role of the sales agent will be in setting up pre-sales ie selling rights in the production to a distributor or broadcaster before the production is actually made. Where there are no pre-sales, a bank’s commitment to provide production finance will depend on the sales agent’s estimates of the selling price of the rights in the film in each of the worldwide territories when completed (see “Gap Financing” above).

(c) Completion Guarantor or Bond Company
Whilst the bank may be prepared to lend money to cashflow the film production either by way of discounting distribution contracts or gap financing, the bank will usually insist on a completion bond (effectively, a performance guarantee) to be in place to guarantee to the bank that (i) the film will be produced in accordance with the agreed budget and will be delivered in accordance with the production and cashflow schedule or (ii) if the film cannot be completed and delivered, it will be repaid its entire loan plus interest. This is provided by specialised completion guarantors. The completion bond is important because distribution advances payable by distributors who have pre-bought the film are generally only paid upon timely delivery of the film to the distributor. Since the right to receive these advances have been assigned to the bank, if for some reason the film is not delivered, then in the absence of a bond the bank would not be able to recover its monies. Banks will want the completion bond to be put in place before they will lend money for film production.

(d) The Lawyer
Needless to say lawyers are a necessary evil in any film financing transaction whether for the bank or the producer. In light of the potentially complicated structures and the voluminous paper work required in any film financing deal, the bank and the producer would be seeking to work with lawyers who are not only familiar with film production and distribution issues but also have an understanding and experience in film financing transactions.

COSTS OF BANK FINANCING

The producer is responsible for all costs associated with securing bank financing for film production. These include:
• the bank’s fee for arranging the finance which will vary depending on the size of the loan
• the bank may charge an additional fee if there is gap financing
• interest on the amount advanced by the bank
• the completion guarantor’s fee for providing the guarantee to the bank (normally based on an agreed percentage of the budget of the film). If the guarantee is not called upon, the guarantor may give a refund
• the bank’s legal fees

The bank may insist that the above fees (other than interest) be paid out of the first drawdown of the advance by the producer. It is common for the overall loan amount to include the above fees.
Cost is a real issue that may ultimately determine whether or not a producer will seek bank financing to finance his film. In Asia, independent film budgets are generally small compared to those in the US or Europe and may range from anywhere between US$100,000 to US$2m. Bigger budget films could range between US$10m to US$40m. Most Asian films are primarily financed through personal financing, angel investors, family members, broadcasters and equity ventures rather than through bank loans. Arrangements between parties are based on trust and good faith, and written contracts and documentation are minimal or non-existent. Despite the wave of international
co-productions and productions taking place in Asia, and the recognition and use of more sophisticated financial and legal models of structuring productions, producers are still very mindful to keep these costs to a minimum.

THE NEXT STEP

The next years will be interesting for the Asian film industry as we see the growing demands for access to funding for film production. With some major banks in Hong Kong starting to offer access to film production financing, we will see more banks and funds following closely behind in the hope of tapping into this very exciting and new potential business. Debt financing or equity financing, or a combination of both will become the preferred model.

Apart from costs, producers may also be faced with the tedious task of reading long documents and participating in lengthy negotiations with many different parties in a film financing transaction. The contracting and approval processes may take months rather than weeks. Asian bank, like any other businesses must understand the market and the concerns of its potential customers. Unlike in the West where voluminous documentation and high lending costs in a film financing transaction may be a given, this could be a deterrent to developing the business in Asia.