Magazine article American Banker

Movie Industry, Riding Boom, Is Glamorous Gamble for Bankers; Growing Roster of Larger Banks Signing Up to Offer Financing for the Production of Films

Magazine article American Banker

Movie Industry, Riding Boom, Is Glamorous Gamble for Bankers; Growing Roster of Larger Banks Signing Up to Offer Financing for the Production of Films

Article excerpt

The last several years have seen "an exponential growth in the banking/film business," according to Malcolm A. Birnbaum, president of United Film Productions and a former vice president in Chemical Bank's entertainment group.

This unprecedented boom is manifested by the more than $1 billion yearly trade surplus produced by the U.S. film and television industry, including a trade surplus with Japan.

Chemical, Bank of America, First National Bank of Boston, and Bank of California are among the U.S. banks active in the film industry. Overseas, the ranks include Britain's Barclays Bank PLC and the Credit Commerciale de France.

"It's an exciting business, a big, money-making business," said Lord Lew Grade, chief executive officer of Embassy communications International and founder of ATV, Britain's independent television network.

"You cannot fail to make money. The [film] negatives alone are worth their weight in gold, especially now, with all of the ancillary rights." Ancillary rights include home videotapes, network and pay TV, novelizations, merchandising, and foreign rights.

The strength of the American movie industry is evidenced by the number of film starts so far in 1984; the numbers are running 24% ahead of 1983 and 64% ahead of 1982. And even with the strong U.S. dollar, which yields less in remittals, 1983 worldwide theater rentals for the nine major studios were up 3.3% over 1982. Home video and pay TV also have contributed several hundred million dollars to the film industry.

However, this rosy profit picture is not necessarily a guarantee of making money in the film industry. "Movie-making is the most inconsistent of all the arts," Jack Valenti, president of the Motion Picture Association of American Inc., said recently. "A good movie cannot be defined or predicted."

Adding to this unpredictability is the fact that the cost of an average movie is $12 million. A film generallyz must gross three times its cost to break even, which means a gross of $30 million to $40 million. Two-thirds of all films do not make back their cost. In 1974, a producer had to sell 3.5 million tickets to break even. In 1984, the figure has zoomed to 12 million.

Bank of America made its first film industry loan in 1909 to a man who wanted to open a nickelodeon. Since then, the film industry has begun to come full circle; once again there are many independent producers and distributors on the scene. However, industry costs are far cry from 1909. "Cotton Club," the new Francis Ford Coppola film, reportedly cost $58 million.

Today, the industry is divided between the major studios and the independents. Bank of America, one of the largest bank serving the entertainment industry, is the lead bank for many major production companies, MGM/UA Entertainment Co. among them.

In the case of the large studios, the accepted procedure is for the studio to have a revolving line of credit. Most of the major studios either have revolving lines of credit or get their financing from parent companies, as with Paramount Pictures Corp., which is owned by Gulf & Western Industries Inc., and Columbia Pictures Industries Inc., which is owned by the Coca-Cola Co.

"The Bank of America has never lost any money on principal," said James Parsons, BofA vice president of entertainment, media, and health. "There is a risk/return relationship, [so] obviously you must look for an acceptable return on your assets. The interest-rate structure for films is higher than for a typical corporation loan because money for films is immediately wired to the film.

"At the Bank of America, we look for present value and signed contracts. The contracts are the collateral -- licensing agreements with rights to exploit the film in the different markets for the licensed buyers. It's very important to understand the ancillary market. For example, when George Lucas borrowed money for 'Star Wars,' he retained the network TV rights for himself; he didn't use them as collateral for that film. …

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