Film studios will have to change their approach to securitization to attract more investors, given the asset class’s mixed results in the past, according to an abridged transcript of a Standard & Poor’s roundtable on the topic.
Participants said that a more hands-on role for investors would lead to more deals.
In a film securitization, the deal’s SPV typically puts up a pro rata share of the production costs in exchange for a pro rate share of the net returns, according to Simon Simonsky, an associate at Guggenheim Partners.
By leveraging capital from a third party, studios can increase returns through leverage and raise liquidity. “I think based on the terms that have been given to the studios in recent years — this has been going on since the early 2000s — they find that beneficial,” Simonsky said.
Clifford Chance Partner Lewis Cohen pointed out that this sector tends to be less correlated to traditional economic drivers than more conventional asset classes such as ABS related to vehicles or housing.
Cohen said it was difficult to predict whether there would be more film securitizations over the next few years. For those considering the possibility, he believed existing film libraries would provide better collateral than the slate of future productions given the former’s more predictable income stream.
Distribution Fee Holds Up Deals
For more deals to happen, Richard Reiner, the owner of Shooting Star Pictures, said that studios need to treat bond investors more as partners and less as subordinates. “[There’s a] perception that studios have typically not looked at these deals as true partnerships,” Reiner said. “Investors have felt that the studio’s distribution fee (a percentage of gross receipts) puts them in a first position and treats investors as junior partners.”
Studios on the other hand, feel that they need to hold on to the distribution fee to cover their distribution overhead. The market has dried up as investors and studios cannot meet eye-to-eye on this issue, according to Reiner.
He believes studios will have to treat investors more as equals by changing the waterfalls in structures. “To attract more deals to the marketplace, waterfalls will have to change to incentivize investors to take motion picture performance risk,” Reiner said.
Sominsky said the distribution fee is the biggest concern for investors. It raises the performance threshold for capital to break even, and misaligns incentives, “where a studio is much more sensitive to the gross performance of a film, whereas the co-investor’s always sensitive to the net performance of a film.”
Reiner said the probability of new deals depends on studios’ willingness to change their approach. “I’m optimistic that studios will do this,” he said. The need may be growing as well. Sominsky said a number of legacy financings reach the end of their reinvestment period in 2013.