There’s a new set of banks making the rounds in Hollywood these days. And they’re landing roles in film finance deals.
OneWest Bank, a Pasadena thrift, and SunTrust Bank, based in Atlanta, have both opened entertainment lending practices in the past year, while other banks such as East West Bank in Pasadena have made key hires to grow theirs.
The institutions have stepped up now that several larger and foreign banks, as well as hedge funds – which entered the market during last decade’s financial boom – have either cut their lending or departed Hollywood after losses.
SunTrust, which started lending to film companies last January, has already committed to lending more than $400 million and expects to do six more deals this year. The bank co-led several deals, including a $350 million credit facility for Century City independent studio Media Rights Capital in September.
“There was a vacuum,” said Christa Thomas, managing director and head of film and TV lending at SunTrust’s office in Century City. “There is borrowing demand.”
The new lenders have largely focused on providing revolving senior credit lines to production and distribution companies with solid finances. Still, others, like OneWest, haven’t shied away from making loans for individual films.
None of the institutions would talk on the record about the profitability of the deals, but sources familiar with them said that interest rates charged by banks ranged between 3.5 and 6.5 points above the six-month Libor rate (or London Interbank Offered Rate). Those rates are higher than many other commercial loans.
“With senior lending in film, you really have a big gap that was created (with the departure of many foreign banks and hedge funds) and an opportunity for a bank that is growing,” said Clint Kisker, director at Screen Capital International, a Hollywood firm that lines up production tax incentives for film finance deals. “It’s very rare that you can find an opportunity to meaningfully increase your market share in a brand-new area.”
But even as big institutions such as Scotland’s RBS Group Inc. and Goldman Sachs Groups Inc. have pulled back, longtime and large film industry lenders, such as JP Morgan Chase Bank, Comerica Bank and Bank of America are still leading the largest deals. For example, in June, a $500 million revolving credit facility and $200 million loan for Legendary Pictures, which produced the hit “Hangover” pictures, was led by JP Morgan, with SunTrust participating.
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SunTrust opened its film practice in January of last year as an addition to its sports and entertainment specialty group, which had already been lending to the music industry.
The bank hired Thomas from JP Morgan, where she had worked but had not led the film finance practice. In November, it opened a Century City office.
The bank placed advertisements in show business trade publications such as Hollywood Reporter, which rarely carries such financial ads.
Thomas said committing capital was the biggest signal to Hollywood that the bank is willing to lend to companies – as long as they have experienced management and the ability to turn a profit with a combination of box office, DVD and digital licensing revenues.
“Speaking with your balance sheet is the most effective way of saying ‘We’re here,’” Thomas said. “We opened an office and that also spoke to the industry about the seriousness of our interest.”
SunTrust has been active. In addition to the MRC and Legendary Pictures facilities, it has had a hand in providing credit to New Regency Productions and Summit Entertainment last year. Thomas anticipates a steady deal flow to continue this year.
She expects the bank will participate in providing at least six lines of credit to film companies, moving from a co-lead or syndicate member to leading deals in sub-$100 million credit facilities for independent production companies. It will also try to become active in single-picture loans.
Staffing up
Meanwhile, Joseph Woolf, who headed Citibank’s entertainment lending practice until 2007, launched the media and entertainment finance practice at OneWest Bank last February.
The institution, which was founded in March 2009 from the failed IndyMac Bank, has so far focused on single-picture loans along with credit facilities. Woolf would not disclose details on either.
One of the fastest growing L.A. financial institutions by deposits, OneWest hired four film finance veterans in addition to Woolf last year. Woolf said the firm’s entertainment lending would be consistent with the thrift’s overall commercial loan range of $30 million to $300 million.
OneWest, which has a loan portfolio valued at $1.42 billion as of Sept. 30, plans to increase its commercial loans dramatically.
“We’re in great position, being a well-capitalized bank,” Woolf said. “OneWest wants to support lending to local businesses across all industries, which includes media and entertainment.”
Another lender that has become active and staffed up in Hollywood is East West. The bank hired film finance veteran Bennett Pozil, who oversaw the financing of “Crouching Tiger Hidden Dragon,” as senior managing director of capital markets.
Pozil declined to comment, but East West focuses on lending to companies that do business in China, which has the fastest growing foreign box office, with an estimated $2 billion haul in 2011. In November, he moderated the U.S.-China Film Co-Production Summit in Hollywood.
And San Francisco-based First Republic Bank, which opened a film and TV finance practice in 2010, hired Charles Heaphy as managing director of its film and TV practice in November. He previously had served as senior vice president of the film finance practice at City National Bank.
By building out the practices with entertainment lending veterans, the banks are hoping to leverage long-term relationships rather than starting from scratch.
“Though you may see new names on business cards, there are a lot of the same individuals who have moved banks,” said Erika Hindle, chief financial officer at Media Rights Capital, which closed a credit facility with about a dozen banks in September.
“They’ve been in the entertainment space for decades and they bring their historical perspective,” Hindle said.
Slate bombs
Of course, though, there is no guarantee of profits in Hollywood, as a slew of private-equity investors discovered when they entered the industry before the crash.
At the time, hot investments were slate deals, in which investors backed multiple films as a group. The idea was that if one or two films fared badly, so long as the entire slate turned a profit, the lender would be safe. But that’s not how it always turned out.
In one example, Virtual Studios, an investment vehicle backed by Milwaukee hedge fund Stark Investments, co-financed a slate of six Warner Bros. films for $528 million in 2005.
The slate never broke even though it included the hit “300,” which earned $456 million worldwide, and the critically well-received “Blood Diamond” and “The Assassination of Jesse James by the Coward Robert Ford.” Sources familiar with the deal said Virtual Studios never recovered its principal and investors, which were never disclosed, lost on the deal. In the years since, studios including Warner Bros. have drawn scrutiny for keeping the most promising films out of slates.
Whether banks that have stepped up their entertainment loans in the past year will fare better remains to be seen, but Kisker said the new deals are providing lenders more safeguards.
One deal structure that became popular last year is for a production company only to receive funding after it’s had a recent hit, perhaps one still in theaters. That allows the lender to set up a realistic repayment schedule.
“It’s more stable, and it’s more sustainable,” Kisker said.
