Simon Fawcett Aaron Kaufman Sona Blessing · • Combining subsidy financing with a disciplined credit platform is ... Film equity investors many times invest in a ... Simon Fawcett

Film Financing - Investment Opportunities

Simon Fawcett Aaron Kaufman Sona Blessing

Film Financing – Webinar Overview

• Debt financing opportunities in film entertainment

• Risk Management and Performance Optimisation in the film space

• Key Trends in Motion Picture Finance

• The difference between debt and equity investment opportunities in the space - the benefits / risks of each

• Film financing - fee structures

• Panel Discussion - Q&As

22Opalesque A SQUARE Webinar, May 13, 2008

Film Financing Opportunities


Single Picture Lending

Multi-picture & Structured Finance Opportunities

Other Asset Classes

Bridge

Pre-Sale Discounting

Production Gap Lending

Soft Money Advance

Portfolio Financing Facilities

Studio Co-Financing Facilities

Producer-driven Slate Opportunities

Other

Television

Music

Video Games

Investment Strategies

• Opportunities we have identified in four main areas of lending:1. Bridge Financing

2. Discounting Tax Credits

3. Gap Financing

4. Pre Sale Discounting

• Each area of lending may be undertaken on a stand-alone basis or in conjunction with other opportunities.

• The Aramid Fund is also exploring investment opportunities in other areas which it expects to grow over time, including:1. Debt Slate Deals - Studio and Independent Productions

2. Opportunistic Financing

3. Distressed Debt Portfolios

• Loans will be secured against a variety of assets, including (but not limited to) tax credits, revenue participation rights, distribution rights, underlying copy right, sales contracts & other receivables



1. Bridge Financing

• The financing of new entertainment content is extremely complex, with many aspects of a typical finance plan being inaccessible until production is complete

As an example, a producer of a motion picture may have secured one or more forms of tax financing which comprise a portion of his production budget, but which is not available until production of the film has been completed

• The producer will therefore need short-term liquidity prior to the commencement of principal photography;

such loans are expected to have a duration of 3-6 months



2. Discounting Tax Credits

• A number of local and national governments around the world have introduced a new form of tax credit or rebate for the purpose of encouraging producers to bring film or television projects to a particular jurisdiction

• Typically, the precise value of these credits or rebates can only be calculated and settled once filming (and in some cases, post-production) is complete, any required audits have been performed, and other procedures & protocols have been followed

• A fund provides advance liquidity to producers who expect to generate such tax credits but are in need of funding sooner;

the duration of such loans is expected to be up to 18 months



3. Gap Financing

• Gap financing typically refers to the uncovered amount of a picture’s budget which remains once equity and other sources of debt financing have already been taken into account

• Financing of this type is closely tied to the disposition of the distribution rights around the world

• Gap Financing recoups in first position from global revenues

• A fund generally relies on benchmarks established by pre-selling these rights in one or more major territories, as well as the expertise of the Technical Services Provider, to manage its risk exposure

Typically, Gap loans have a duration of 12-15 months


Risk Management

• It is anticipated that in many instances one or more members of the Technical Services Provider will have an existing relationship with a producer of a motion picture that borrows from the fund (or a direct commercial relationship with the motion picture in question) which will provide an extra measure of specialised knowledge

• Rely on the expertise of the Technical Services Provider to conduct thorough due diligence with respect to each opportunity a Fund considers, and to monitor the status of all active deals


Deal Due Diligence

� Project assessment

� Commercial analysis by Media Advisor

� Collateral analysis

� Review of all key financing & distribution contracts

� Legal risk

� Fraud risk

Deal Monitoring

� Ongoing production monitoring

� Ongoing market analysis

� Analysis of territory sales (as appropriate)

� Ongoing monitoring of tax benefit compliance (as appropriate)

� Regular submission of Deal Monitoring -report by Technical Services Provider to the Fund

Risks Factors

• Availability of Lending & Investment Opportunities

• Market Risks

• Illiquidity of Participating Shares

• Integrity of Assets Used as Security by the Fund

• Media Asset Valuation

• Foreign Counterparties & Jurisdictions

• Counterparty & Documentation

• Leverage, Fees, & Lack of Liquidity of Underlying Investments

• Concentration of Investments

• No Current Income

• Hedging & Currency Risk

• Withholding Tax


Key Trends in Motion Picture Finance


US State Based Incentive Programs - 2000


TransferableCredits

Major Rebates

Minor Rebates

US State Based Incentive Programs - 2008


TransferableCredits

Major Rebates

Minor Rebates

National Production Incentives - 2000


National Production Incentives - 2008


New Incentive Programs

Los Angeles Feature Film Location Shooting Days

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

199419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

07

Year

Shooting Days

(Source: FilmLA)

USD vs. Euro

Productions Headed “Onshore”

Concluding Observations

• Dominance of third party capital fundamentally changing the competitive environment for motion pictures

• Major studios have ceded the field of financing USD40mn and under budgets to “independents”, fueled by this new source of capital

• Benefiting from the weak dollar, US state governments are luring productions back on-shore – this trend is likely to continue

• Combining subsidy financing with a disciplined credit platform is more complex, but is also the key to successful hedging.

Aramid is increasingly a gatekeeper in this space because of its depth of knowledge and the integrated financial services it offers.

• We have strong protected deal flow, with growth likely to come from expanding into adjacent asset classes of TV, music and video games.


Equity Investor Opportunities

The current film investment marketplace provides equity investors with unprecedented opportunities. The following will provide an overview of today’s landscape, solutions for many common challenges and the advantages of equity investing.

Part 1 - Market Overview

Part 2 - Common Film Investor Challenges

Part 3 - Example Deal Structure

Part 4 - Performance Scenarios


Market Overview - Films Released Domestically

The increase in worldwide box office coupled with the addition of new media platforms has had a dramatic effect on the level of demand for additional film product:

•Consumer appetite for film product has grown consistently

•The demand and absorption of film product has grown dramatically

•The total films released in 2006 increased by 11% from 2005

•The total films released in 2005 grew 12% from 2004


Domestic Films Released Annually

Source : MPAA 2006 U.S. Theatrical Market Statistics

Market Overview - Increased Reliance On Independents

• 18% of the US Domestic Box Office comes from Independent Distributors

• 39.5% of studio released product is acquired from Independent Producers

• Studios rely heavily on Independent Producers to provide its product

• Increased demand for film product has created demand for independently produced product

• Increased levels of financing at the studio and distributor level has inflated the prices paid to acquire independently produced film product


Motion Picture Industry Reliance On Independently Produced Product

Source | Cofinancing to Manage Risk in the Motion Picture Industry, Ronald L. Goettler, Phillip Leslie

Market Overview - Opportunity Created For Independently Produced Product


Studio Investment Vehicles

Institutional Investment

Over $6 Billion of Financing

Common Film Investor Challenges

Individual Film Investors face a common set of challenges when approaching the world of film investing:

•Single Picture Investing

Film equity investors many times invest in a single picture, this does not provide an investor with the risk diversity which can be achieved through a fund or slate investment.

•Nebulous Project Valuation

Most individual film investors do not deploy a project valuation methodology to establish the true value and viability of a film investment opportunity.

Investors must fully understand factors such as:

– Foreign Market Sales Potential

– Foreign Market Value to Negative Cost Ratio

– Foreign Market Value of Individual Talent

– Domestic Market Value and Sales Strategy

– Historical Performance of Talent, Producers, Genre

– Salvage Value

– Best-in-Breed Vendors

– Market Rates & Fee Structures


Common Film Investor Challenges

• Finance Optimisation - The film equity investor has the opportunity to drive the overall deal structure for a given film, thus the equity investor has an opportunity to avoid the following pitfalls:

– Inefficient use of debt financing - Many film investors do not make aggressive use of the considerable debt financing options available. Efficiently using debt lowers aggregate risk by lowering the amount of required equity.

– Budget Optimisation - Individual investors typically do not size the overall negative budget of against the foreign market value of an individual film investment.

– Soft Money - Individual investors frequently fail to fully utilise regional soft money sources

– Due Diligence - Many film investors do not execute a comprehensive due diligence methodology prior to investing equity. The equity investor should adopt a due diligence methodology similar to that of senior and mezzanine debt providers.

• Access to Quality Film Investments - The individual film investor many times will not have access to the highest quality film investment opportunities.

– Direct Talent Relationships - Investors many times view investment opportunities after more experienced financiers have passed. Developing direct talent relationships with actors, directors and producers may provide an investor higher quality deal flow.


Structured Film Investment | Deal Structure


Equity Investments are typically less than 50%

of total budget

Equity Film Investing | Performance Scenarios

• The following are three Independent Film Investment Performance Scenarios


Performance Level 1 Performance Level 2 Performance Level 3

Film Production Budget $5,000,000 $5,000,000 $5,000,000

Equity Investment $2,000,000 $2,000,000 $2,000,000

Foreign Pre-Sales $500,000 $500,000 $500,000

Super GAP Debt Provision $1,500,000 $1,500,000 $1,500,000

GAP Debt Provision $500,000 $500,000 $500,000

Soft Money Financing $500,000 $500,000 $500,000

Total Film Investment $4,500,000 $4,500,000 $4,500,000

US Region Sale $2,255,000 $2,375,000 $2,500,000

Total Foreign Sales $3,087,546 $3,371,550 $3,675,000

Total Pre-Release Revenue $5,274,896 $5,675,300 $6,100,000

Total Pre-Release Profit Return $426,193 $646,415 $880,000

Post Release Revenue $0 $0 $750,000

Pre-Release Profit % 21.31% 32.32% 81.50%

Film Financing - Fee Structure

• Bearing the investor’s interest in mind, what should be an appropriate fee structure?

• It should be no different than any other alternative investment:

2% pa management fee

+

a 20% performance fee paid at the end of the investment term


Structure - Loopholes , Heed Caution !

• The investment returns of each venture tends to be wholly dependent on the detail of the co-financing and revenue participation arrangements,

which historically have not favoured the investor

• Tends to be fairly typical for co-financing/co-production “partners”using complex revenue waterfalls and inequitable fee structures –

• Which inhibit the transparency, accountability and inherent profitability of the individual projects and the overall slate


Use of Guarantees vs. Immediate Funding

• The use of guarantees rather than immediate funding provides:

a greater degree of flexibility for the investor’s profitability of the individual projects and the overall slate

• As an example:

A fairly typical engagement would see the venture partner taking fees at a number of different levels:

Starting with 20% of the profit until the investor recovers 110% of their capital,

then

Increasing to 40%, 50% and as high as 65%, in some cases, as the venture generates higher profit


Management Fees

• Management fees can be as high as 3% per annum

+

• Producer fees, production overheads and miscellaneous expenses that can be an additional 5% to 20%

• The revenue streams are impacted by the studios/distributors charging:

distribution fees in excess of 20% of the budget

+

immediately recouping any print and advertising costs and other expenses they may have incurred (which are often hidden), with a margin built in on top


Altering the Investment Risk Profile

• To further compound the investment’s potential,

the minimum number of projects over the term of the venture can be fairly low

in comparison

to the requisite capital commitment

• The risk profile of the investment can be severely altered :

as projects can actually be a mere sub-set of the total production of that studio or producer – “cherry picking”

rather than an opportunity

to truly co-finance all the products from that source


Transparency? Accountability? Solutions?

• The industry has a history of frequent litigation, obscure accountancy practices and general obfuscation

• Clear, transparent and mutually beneficial terms must be agreed, with on-going monitoring and reporting which ensures that the investment maintains the same risk profile

• It is essential to have full right of audit with all parties, across the entire supply chain

• The objective should be achieving an alignment of interests

all parties that co-finance a deal must have interests which are aligned as exactly as possible.


Peculiarities

• The equity investors are poorly positioned in typical film fund investment vehicles which rely heavily on tax rebates, debt financing and cross collateralisation - with inequitable fee structures, overheads and producer salaries.

• It is possible to reverse this position by providing a flexible exit strategy at the end of the investment term.


Recycling of Revenues in Films

• Tends to be remarkably quick

• With well placed, highly controlled film investments across a portfolio of slates, there is a strong chance of a fund generating profits in a relatively short term,

• This affords the investor the option of short term liquidity,

as the fund’s cash surplus proportionally reduces the underlying investor’s guarantees


Panel Discussion – Q&A

Q: Relates to equity portion of the film financing business - when lending to a movie project, who are the typical equity investors?

• Who do you typically look for to be putting equity into the deal?

•What are the terms of the equity and the debt (i.e. covenants, pledges, etc.)?

• It would seem to me that films are like venture investing. How do you decide which projects will move forward or are you financing a portfolio of projects to mitigate risk?


Contact Info.

Aramid Capital Partners

76 Dean Street

London W1D 3SQ

www.aramidcapital.com

Barbarian Films

110 Greene Street, Suite 402

New York, NY 10012

www.wearebarbarian.com

Opalesque A SQUARE,

Kindergartenstr.8

8454 Buchberg, Switzerland

www.opalesque.com


Simon FawcettChief ExecutivePhone: +44 (0) 207 009 6600Email: [email protected]

Aaron Kaufman

Principal, Barbarian Films, LLC

Phone : +1 212 561-5294 | Mobile: +1 646 708-42622

Email: [email protected]

Sona BlessingPhone: +41 22 5481889Email: [email protected]

Documents

Simon Fawcett Aaron Kaufman Sona Blessing · • Combining subsidy financing with a disciplined credit platform is ... Film equity investors many times invest in a ... Simon Fawcett