The film Unhinged seems to be living up to its name. In a move as improbable and fearless as any on-screen stunt, the forthcoming thriller starring Russell Crowe will shortly attempt to land a real cinema audience and help claw the movie business out of a three-month torpor.
By bringing forward its release date from September, Solstice — the independent studio behind Unhinged — is making a $30m bet that on July 10 Americans will come out to see the first new film in cinemas since the pandemic shut down theatres and halted production in March. Though a precise date is yet to be set, it will also be shown in UK and Irish cinemas next month.
“We are the proverbial canary in the coal mine,” says Mark Gill, chief executive of Solstice. “We don’t know how this will work out. It’s impossible to project.”
Indie filmmakers are used to taking both financial and artistic risks but a daring mindset may prove essential in the post-coronavirus era. For when sets and cinemas went dark, the patchwork system for financing films made beyond the big studios also froze.
Hollywood is now seeking to reopen: California said last week that production could resume. But the industry does not expect investors to return along with filming, according to interviews with a dozen media bankers, lawyers and producers. Production costs are rising, revenues look less certain and lending and insurance are evaporating — leaving equity investors more exposed.
“It’s super-dangerous to be an investor, it’s totally insane,” said one banker in the sector overseeing hundreds of millions of euros of loans to film projects.
There is an expectation that commercial lenders and some private financiers will balk at taking coronavirus-related risks, further increasing Hollywood’s reliance on deep-pocketed streamers such as Netflix or Amazon to fund films.
Exacerbating the shift is a two-decade-long squeeze on the traditional model for bankrolling movies through presale deals on territorial rights, struck at festivals such as Cannes or Sundance, which were then used to raise loans. “Right now, on a classic British indie film, you could be happy with 10 or 20 per cent of the budget coming from international presales and it used to be as high as 30 to 50 per cent,” said Zygi Kamasa, chief executive of Lionsgate Films UK, a movie distributor and producer.
As cinema attendance waned, the movie business had already been veering towards crowd-pleasing superhero fare and away from independent film. In a post-Covid-19 world, there is even less certainty on how much a risky movie can earn.
“Is there the capacity for a movie like Joker to return the $1bn it made at the box office?” asked Jim Moore*, chief executive of Vine Alternative Investments, the majority shareholder of Village Roadshow, one of the financial backers of the Warner Bros movie whose outstanding success in 2019 took the industry by surprise. “I’m not so sure. If, between capacity issues and social distancing, people are even more selective about what brings them to the theatre, indie films may not find enough of an audience to warrant the cost and risk of theatrical release.”
The losers will be smaller films and prestige projects that have long depended on investments from a rotating cast of starry-eyed financiers, from pre-Lehman Wall Street bankers in the 2000s and more recently cash from China and Saudi Arabia.
In the short term, the big problem for independent filmmakers is how to manage coronavirus risks during production. Insurance companies are refusing to cover pandemic-related scenarios such as a cast member falling ill or a second shutdown. Only a handful of countries such as France and the Netherlands have governments stepping in to help fund insurance coverage.
“No insurers at this stage are prepared to take the risk on a production because they are in the game of insuring against something that is low risk and high impact, whereas the effect of virus on production in the foreseeable future is quite probable,” said Christos Michaels, a lawyer at Lee & Thompson.
MUFG Union Bank, a longtime lender to Hollywood, has increased interest rates on production loans in the range of 0.5 per cent to 1 per cent to reflect the new working environment.
“The world is riskier,” said Bryan Lacour, MUFG’s head of entertainment finance. When evaluating loans, his team has been asking clients to run risk scenarios to predict how much budgets might rise if there is a production halt lasting several months.
Texas-based Comerica, a lender that has backed movies such as Twilight and provides credit lines to indie studios including A24, is unwilling to entertain the risk at all.
“Let’s say in October there is a massive [coronavirus] outbreak. Comerica doesn’t want to take that risk,” said Morgan Rector, who oversees Comerica’s entertainment group, which focuses on production loans of between $30m and $50m. “If we can’t get the insurance, then we won’t finance.”
The number of banks serving Hollywood has shrunk from more than 30 during the mid-2000s boomtime to between 10 and 15 today, bankers estimate. A few commercial lenders have exited the market in the past few years as the economics of movies became more precarious and Netflix’s star rose, giving people less reason to leave the couch for the cinema.
Big studios have the scale to absorb the hit from increased production costs resulting from Covid-19 precautions and rising insurance premiums. But some smaller producers with budgets of between $5m and $20m a film are likely to struggle.
Distributors are a further weak spot. Many made advances on movies — minimum guarantees to producers — and must now decide whether to invest in promoting films to an uncertain cinema audience.
“It will end up reducing their expenditure,” said Christophe Vidal, deputy chief executive of Natixis Coficine, which lends about $1bn annually to the television and film sector. “If local distributors are having trouble, it jeopardises the whole chain, and if that film doesn’t do well, the next film they pay less for.”
The winners so far have been large tech companies that in recent weeks have been scooping up films to pad their streaming services. Netflix has acquired movies such as MGM’s Bad Trip and Paramount’s The Lovebirds, which were originally intended to be shown in cinemas in April. The company has received an influx of pitches from studios trying to offload movies in recent weeks, according to people familiar with the matter.
It is a welcome new market for filmmakers but one that involves sacrificing the potentially greater gains from a big box office hit such as Joker or Parasite.
Neil Forster, chief executive of Ingenious, a leading media finance group that backed Unhinged and blockbusters such as Avatar, said rising demand from streamers showed “the right films can have a long revenue tail”, making money beyond the cinema.
“Cinema has faced plenty of challenges before: the threat of television, videocassettes, DVD, video-on-demand. It has always survived and, indeed, grown box office even in periods of economic downturn,” he said.
Sovereign wealth funds and billionaires could be sources of equity or mezzanine loans for the industry, according to Mr Gill.
But Tom Ara, a veteran entertainment lawyer for DLA Piper, has doubts about this scenario. He questions whether, at least in the short term, wealthy individuals will still want to finance movies if many of the perceived perks — such as glitzy premieres and meetings with A-list actors — are scaled back or eliminated altogether because of the pandemic.
“For the rich who invested in films for the glamour and fun of it, those days for now may be over,” he said.
*This article has been amended to correct Mr Moore’s current role and the studio behind “Joker”.
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