By JILL ROSENFELD
Staff Reporter
Getting a film financed is a complicated endeavor, and “The Thin Red Line” is a case in point.
The $50 million movie, a World War II drama directed by Terence Malick and starring Sean Penn, Nick Nolte, John Travolta and others, is currently in post-production and due to be released this Christmas season.
The quest for funding, though, actually began in April 1997, when Twentieth Century Fox Film Corp., distributor of the movie, contacted Beverly Hills-based City National Bank, one of the leading lenders to Hollywood. Fox wanted to know if the bank would be interested in issuing a loan to producer Phoenix Pictures.
Richard McCune, vice president for the entertainment division of City National, followed up by calling a Phoenix executive, who explained the details of the project, from the budget, to cast, to storyline.
McCune put together a proposal internally by consulting with the head of the entertainment division and with the bank’s foreign currency department, since the production would be shot in Australia using Australian dollars.
The most important information the bank needs to know in assessing a potential movie production loan is the creditworthiness of the distributors and the amount the distributors have agreed to pay the producer upon delivery of the film.
Phoenix had arranged for Fox to distribute the film worldwide, except for Japan, where Pioneer LDC would distribute it. The value of Phoenix’s contracts with those two distributors is enough to cover the film’s $50 million budget. But since the distributors don’t pay until they actually have the completed film in hand, a loan is needed to make the movie.
The distribution deals are enabling Phoenix to make the movie without putting any of its own money at risk. “It’s called, how to make a movie with no money down,” quipped Diane Isaacs, director of contract administration for Phoenix, who handled the paperwork for “The Thin Red Line.”
The bank is careful about analyzing the creditworthiness of both domestic and foreign distributors because the payments from those distributors ultimately will be used to pay off the loan. If a distributor is not well known or not financially credible to the bank, the bank may require cash collateral, a producer’s guarantee, and/or a letter of credit from the distributor’s bank.
“The Thin Red Line” deal was relatively simple in that both Fox and Pioneer are well-known, established companies and are the only distributors. Often there are 10 or more distributors involved in a single movie deal, with each one handling a particular channel U.S. theaters, pay T.V., European theaters, foreign video, etc.
This deal was also simplified by the fact that the distribution package had been finalized and its value was sufficient to cover the entire production budget.
In certain cases, a bank may make a loan to a producer before all of the distribution deals have been cut. Such cases usually involve some haggling between the bank and producer over how much the rights are worth. The bank often provides considerably less than the entire amount slated by the budget.
Within a day, McCune got back to Phoenix with a loan proposal. Meanwhile, Phoenix, in search of the best deal, had been talking with other banks. In this case, McCune says, Phoenix accepted City National’s initial offer, but in many instances producers try to negotiate a lower price for the loan.
When Phoenix and City National had verbally agreed to terms of the deal, McCune wrote up a credit report and presented it to the senior loan committee for approval. Once the credit approval was obtained, the various parties brought in legal counsel to document the rest of the process.
The amount of money requested by Phoenix for “The Thin Red Line” exceeded City National Bank’s internal limits, so the bank syndicated the loan, meaning it brought in a partner, Fuji Bank Ltd.
City National is the “designated agent,” which means that if Fuji Bank drops out or fails, City National will shoulder Fuji’s financial responsibility or get another bank to do so.
City National, like all film lenders, requires that the production company buy a completion bond, which specifies that the bond issuer agrees to repay the loan in the event the movie is never finished.
“In a worst-case scenario, if the picture was abandoned but production costs had been incurred, the insurance would kick in from the bond, and the bank would be paid off,” said City National’s McCune. “Without the bond, the bank would be in deep trouble, and that’s a technical term.”
Then the bank enters into a legal agreement with all involved partners, so that everyone is clear who is responsible for what, and who pays whom. At that point, all parties gather at the law firm representing the bank to sign the contracts, with two copies going to each party. “So Fuji Bank signs 17 times on page 27, and so on and so forth. Then it’s a hearty handshake and yeah, it’s official,” Phoenix’s Isaacs said.
Because the movie was shot in Australia over the course of seven months, the bank locked in exchange rates with a “forward exchange contract,” by purchasing Australian currency at the time of the deal.
Also, Pioneer, Phoenix’s Japanese distributor, had agreed to start making payments for distribution rights in advance of the film’s completion. So City National established an escrow account to hold the incremental payments in trust until the picture is complete and delivered.
Once the movie is finished, copies will be handed over to the distributors, along with extensive documentation from the film cast and crew contracts, musical score, etc. Phoenix also delivers an official notice to each of the distributors giving them 30 days to look over the film and paperwork, and to pay up.
Getting paid on time is crucial for Phoenix because the interest accruing on the bank loan during those 30 days is not part of the movie’s budget, and any delays in payment cause that accrued interest expense to rise.
When the distributors have paid Phoenix, Phoenix will repay the bank loan.
