23/03/2009 - In passato è stato difficile per il cinema europeo riuscire a finanziare interamente i propri budget cinematografici. Cosa accadrà in questo clima globale di crisi finanziaria? L’articolo cerca di rispondere al quesito spiegando la funzione storica e attuale degli strumenti finanziari a breve e a lungo termine.

One of the biggest problems for European film productions - if not the biggest - is to have access to finance. It is an endemic problem of this industry within the European Union, even for the so called big five European (audiovisual) markets: UK, Italy, Germany, Spain and France. In fact, this economic anomaly is more one of the characteristics than a problem of the European cinema, although, if it was hard to have access to finance in the past, what will happen in these times of financial crisis?

In 2007 the subprime mortgage crisis in the USA started to become visible and turned more and more evident in 2008. It is not necessary to appeal to the butterfly effect to know that sooner or later it would contaminate Europe. The history of economy has shown that “when America sneezes, the rest of world catches a cold”.

Bridging and gapping
The film financing structure will remain more or less the same, at least in the short term: public funds and subsidies, tax shelters (like in the UK, Italy or Belgium), TV channels’ investment which is partly regulated by EU legislation, producer’s investment, fee’s deferments, and presales. However, after having eggs and flour we need the chocolate to finish the cake. A producer may need financing to fill the gap between the raised money and the total budgeted amount (gap financing) in order to be able to go into production. As well, he has to be sure he can afford every payment during production on time. Public institutions grant subsidies by way of several payments over the time, but some of them are attributed only after shooting. Therefore, the producer will need to finance the cash-flow (bridging financing).
In order to be able to prepare an accurate financing plan, it is necessary to know both the existing financing mechanisms and how the crisis can influence them.

In the past banks gave loans both for bridging and gap financing (this last one was less common in Europe, especially in continental Europe) of film productions. The latter had a high cost, with an interest rate of 3% above the base rate plus a fee of around 8% of the value of the gap financing. It was not easy to obtain, even though it has become more and more difficult in the last years, and will be almost science fiction with the new scenario in the near future. Producers should expect less than never to finance a part of their films with gap financing provided by a private bank. Just some banks in the UK (the Royal Bank of Scotland, Bank of Ireland or Comerica) offered this service regularly in the last years, but the future is pretty uncertain. Unfortunately, the alternative consists in asking a private investor for private equity. Whatever the participation of the investor is, he will usually ask for a significantly higher equity of the film in proportion to his investment. That means the producer’s share of the profits will drastically decrease.
The public administration has created mechanisms to fill this market gap in different countries. For instance, the German Federal Government launched the DFFF (German Federal Film Fund) in 2007. It attributes Euro 60 million a year to film production, consisting in an automatic grant for productions in Germany which already have achieved at least 75% of the planned budget. A distributor may also agree to distribute the film in Germany with at least 30 copies. The maximum granted amount is fixed to Euro 1 million.
In France a kind of company called Sofica (société pour le financement de l'industrie cinématographique et audiovisuelle) was created at the end of the 80’s. The Soficas make an investment portfolio with a precise risk analysis and attract non audiovisual companies to invest in cinema thanks to the attractive fiscal discounts. Even if it is not soft money at all, we can say it is not as hard as private equity or bank gap financing.

Nevertheless, bridging financing is still possible at present although banks are becoming more and more suspicious. Of course, it also depends on the country: it is easier in the UK and much more difficult in small Eastern European countries. Since the problem is that banks do not really have confidence in the completion of the films or the full recoupment of the lent money, the philosophy of most of the public incentives consists in creating a confidence pool. This is achieved by assuming part of the risk of a project the bank would assume in absence of public intervention. The options range from a direct subvention of a public investment bank (i.e. ICO, the Spanish State-owned Investment Bank) to the creation of specialised institutions mediating between producers and private banks: In France IFCIC guarantees between 50% and 70% of the granted loans. This means that when a company fails, the bank’s losses are cut by half. In Spain, Audiovisual SGR is a Mutual Guarantee Society that typically assumes 100% of the risk in front of the bank. The two latter are half public institutions giving advice to banks on the risk of each operation, an expertise which banks usually do not have. Therefore these kinds of company avoid that banks do not lend the money not because the film is risky or not, but because they cannot determine if it is viable or not.
In the context of the crisis banks are not expected to lend more money than necessary to have a healthy cash flow, however this also depends on the project and the reputation of the production company and, of course, on the country.

The problem is not only getting access to finance, but also affording the financing costs (especially for SME’s). The MEDIA Programme of the EU has its i2i scheme focused on access to finance, with an available budget of Euro 3 million. It is divided into three modules: insurance costs, completion guarantee costs and financial costs. Independent production companies can be granted up to 50% of the costs of one or all the modules (60% for countries with low audiovisual capacity), with a ceiling of Euro 50.000 for each film.
Sometimes we find measures combining support for access to finance and for the reduction of the financing costs. In Spain a scheme is available as a result of an Agreement between ICAA (Cinema Support Institute) and ICO (the Spanish State-owned Investment Bank). The latter provides a line of mediation with private banks of up to Euro 50 million a year for the production of feature films while ICAA allots Euro 2.5 million in order to reduce the interest rate of the loans conceded under the umbrella of this scheme.

An uncertain future?
According to Karl Baumgartner, founder of Pandora Films, it is for sure that the average budget for European films will go down within the next years since in the short term the number of productions will not decrease as there will be less money available in the market. Wild Bunch’s CEO Vincent Grimond seems to share Baumgartner’s opinion: “There is less money to make movies. Therefore they must be less expensive, since the audiences still go to the cinemas”.

Nobody knows what will happen tomorrow, and much less in a couple of years, but the logic says that the financial crisis does not necessarily have to affect the proportion of mainstream, intermediate budget, and art-house films. But the cinema producers are not the only ones affected by the financial crisis. In opinion of Senator Entertainment’s CEO Helge Sessel small and medium size distribution companies are having problems to pay the P&A costs (print and advertising), as well as broadcasters have less and less money for movies. It will have a collateral effect for the production’s companies in form of less pre-sales and lower distributor’s advances.

The deferment of the fees probably will be a must for many small productions and the solution, more than ever, will be the international co-production.