Inflation woes hit independent productions hard

Inflation woes hit independent productions hard

As industry mavens descend on the Zurich Film Festival, escalating costs of inflation and rising interest rates are hijacking dreams of a post-pandemic recovery and renaissance. Together, these funding challenges add up to unstable budgets that still face COVID-induced costs that continue to send production budgets 10% north on average.

Observers have to go back to 1981 to find inflation rates above the current 9%-10% in Western countries, while prime bank lending rates now stand at 5%-6%, matching levels of the financial crisis of 2008-09.

Take first the rising cost of borrowing, after a decade of extremely cheap money, and the pressure on producers is now acute: “You have to consider that most independent financiers are still looking to cut their anyway. Interest is a key cost line that many producers either don’t understand or are forced to consider late in the day,” says Brian Beckmann, CFO of Arclight Films, which is behind “Poker Face by Russell Crowe. “Now the cost of money has gone up everywhere.”

The three key pillars of independent film financing, senior debt, gap financing (i.e. mezzanine) and equity, are affected in different ways by rising interest rates. Equity is the least affected, as it exists in hard cash and sits on the table, meaning it is last to collect, then shares the net profit points with the producer and talent after the break even. Although a premium of typically 10% to 25% may be added to the principal investment which is repaid before any subsequent cascading beneficiaries, neither usually bears interest.

Senior debt, however, is more interest rate sensitive, given the time collateralized loans – including tax incentives, rebates and presales as well as other receivables – may take to be repaid. And gap financing remains an excessively expensive tool for borrowing against unsold territory and future revenue streams (set at 15-20%+ and now rising), and often used as a last resort by independent producers.

Where that leaves traditional entertainment banks is a moot point, as their degree of flexibility is limited by being locked in by rising rates and tight credit committee restrictions. “Their rigidity means that prices are constantly changing and can start in the low single digits and end up more expensive by the time you close,” says Beckmann. Others agree, with Head Gear Films founder Phil Hunt saying that “there has never been a better time than in the past 20 years to be a private lender. And as interest rates rise, the price of a Head Gear loan drops to the point that many growers come to us first and don’t haggle as much.

Along with competitive pricing and speed of decision-making, Hunt points out that given the turmoil in the global economy, it’s vital for second-tier lenders to play to their strengths: “Banks are generally far from daily difficulties faced by production processes, as producers need answers faster in the current climate. And speed is everything – I’m Head Gear’s credit committee! Hunt said.

Meanwhile, runaway inflation continues to bloat budgets that are under pressure from rising costs for timber, steel, fuel and electricity, etc., alongside supply chain delays world. Line producers report that costs are now 15-20% higher heading into fall than a year ago. As streamers and studios continue to struggle on the high end of the market, indies are forced to tighten their belts and save.

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