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Wall Street Turmoil Leaves Hollywood Vulnerable

Tuesday, 16 Sep 2008 02:15 PM

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NEW YORK — The film-finance world may not feel an immediate pinch from the Lehman Bros. Chapter 11 bankruptcy filing and the Bank of America plan to buy Merrill Lynch, but there may be an ouch longer term.

"A financial market that's in a meltdown is not good for the industry in so many ways," is how film-finance attorney John Burke put it Monday.

Admittedly, the studios and start-ups that have made use of funds from institutions such as Merrill Lynch have locked in money and interest rates for the near-term. For example, the rats already are set for Summit Entertainment and Marvel Studios, both of which have credit facilities with Merrill.

But some companies could see their futures clouded as the Merrill sale goes through.

MGM's United Artists division, which has a $500 million production facility with Merrill, has only one movie on the immediate horizon — the Tom Cruise vehicle "Valkyrie" — and could find itself facing tough questions from new Merrill owners Bank of America.

In the most dramatic scenario, that could lead to the facility's being pulled.

Although Bank of America is seen as a solid institution with its own history of film investment, at least one rival executive said Monday that an exit from the UA deal is a distinct possibility.

"The new owners will have teams of accountants who will be looking at every loophole and trap door in the deal because that's what they do — and they're being told to get rid of all their risky investments," the high-ranking film exec opined.

Meanwhile, UA's parent could find the road rockier in the wake of Monday's stock market tumble. The Lion has said for a number of weeks that it's been close to a production facility, with Goldman Sachs retained as the studio ramps up original production under Mary Parent.

MGM declined comment.

Meanwhile, the Weinstein Co. is believed to be seeking further financing, turning to Asian sources after its Goldman Sachs fund, formed by a combination of debt and equity, draws to a close.

Merrill also has a set of existing slate-financing deals such as Walt Disney Co. and was part of a deal at Paramount; any pictures under existing deals will not be affected by the Merrill takeover.

In some respects, Paramount already has begun to deal with the tightening credit market. In July, the studio abandoned efforts to raise $400 million-$450 million in an overall deal with Deutsche Bank and said it would co-finance future movies on a picture-by-picture basis.

Lehman, for its part, has been quieter on the film-finance front than Merrill (one of the few deals it did was with Warners-based Alcon Entertainment, which FedEx chief Fred Smith owns). Although the bank still has a dedicated division and has been scouring for investment targets, film-finance insiders say they have not considered the company to be a major player for several months.

Still, many warn of hidden consequences when an institution of Lehman's size goes under. Even if the bank did not invest directly in many films, it was responsible for investing in and loaning money to high net-worth individuals and hedge funds, who in turn poured their money into single-picture movie financing.

"If those individuals and hedge funds can't get money from the banks as easily, they're going to use their money on their core business and spend a lot less on the film business," film-finance expert and former Walden Media COO John Logigian said. "There's a trickle down effect."

Relativity Media, which has been accruing much of its film-finance capital primarily through the hedge fund Elliott Associates, could be among the players to feel this impact, however indirectly.

There are also tricky questions for many companies down the road. Summit, for example, could find it more difficult in going back for another $500 million in debt financing, as its initial agreement with Merrill allowed.

In a sense, Monday's news is not a watershed event, just a continuation of the credit crisis that has hit the film business hard, either shutting off money sources or jacking up interest rates so high that it makes reasonable film budgets impossible.

But the double whammy of a company going under and another being swallowed up exacerbates the crisis. And those effects may not just be financial: They could put more pressure on the movies that equity- and debt-financed companies are releasing.

Summit is right now riding a buoyant wave with its teen-vampire tale "Twilight"; the Weinstein Co. has strong early word on its R-rated comedy "Zack and Miri Make a Porno." The rocky financial landscape means those movies are carrying even more of their companies' weight.

Still, one executive who has been known for bracing assessments said Monday that he believes that the Bank of America bailout actually offers hope.

"I think we just passed the bottom," the Film Department's Mark Gill said. "I think it's still pretty rocky, but it's better now than it was on Friday because there's now certainty returning to the market. It's a long and dark and nasty tunnel, but what the Bank of America news means is that we will eventually get out of it."

Reuters/Hollywood Reporter

© Thomson Reuters 2008. All rights reserved.

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