Inflation hits higher cost indie productions

As the industry settles in at the Zurich Film Festival, escalating inflation costs and rising interest rates hijack dreams of a post-pandemic recovery and rebirth. Together, these financing challenges come on top of unstable budgets that continue to face COVID-induced costs that are driving manufacturing budgets north by an average of 10%.

Observers have to go back to 1981 to find inflation rates higher than the current 9% to 10% figure in Western countries, while prime bank loan interest rates are now 5%-6%, which corresponds to the level of the financial crisis from 2008-09.

First take the rising cost of borrowing, after a decade of extremely cheap money, and the pressure on producers is now acute: “You have to remember that most indie financiers are always looking for lower budgets anyway. Interest is a major cost that many producers don’t understand or have to factor in late in the day,” said Brian Beckmann, CFO of Arclight Films, which is behind Russell Crowe starrer “Poker Face”. “Now the cost of money has risen everywhere.”

The three main pillars of indie film finance, senior debt, gap finance (also known as mezzanine), and equity are affected in different ways by rising interest rates. Equity is the least affected because it exists as hard cash and is left on the table – meaning it is recovered last and then shared in net profit points with the producer and talent after the breakeven point. While a premium of typically 10%-25% can be added to the main investment paid out before paying out another waterfall recipient, neither is typically interest-bearing.

Senior debt is more sensitive to interest rates, however, given the time it can take for collateralised loans — including tax incentives, discounts and presales among other receivables — to be repaid. And gap financing remains an inordinately expensive tool to borrow against unsold territories and future revenue streams (pinned at 15%-20% plus and now rising), and often used as a last resort by indie producers.

Where this leaves traditional entertainment banks is a moot point, as their degree of flexibility is limited by being tethered to now-rising rates and the strict restrictions of credit committees. “Because of their rigidity, prices are constantly changing and can start at one figure and get more expensive by the time you close,” says Beckmann. Others agree, such as Phil Hunt, the founder of Head Gear Films, who claims that “there has never been a better time than in the last 20 years to be a private lender. And as interest rates rise, the price of a Head Gear loan drops to the point where many producers come to us first and don’t negotiate as much.”

In addition to competitive pricing and speed of decision-making, Hunt points out that given the turmoil in the overall economy, it is vital for second-rate lenders to leverage their strengths: producers need faster answers in the current climate And speed is crucial – I’m the Head Gear credit committee!” says Hunt.

Meanwhile, raging inflation continues to push budgets that have felt the pressure of rising costs of wood, steel, fuel and electricity, etc., in addition to global supply chain delays. Line producers report that costs are now 15%-20% more expensive heading into the fall than a year ago. As the streamers and studios continue to play it out at the top end of the market, Indians are being forced to tighten their belts and cut back.

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