One of the most important events ever to impact independent motion picture financing and production was revealed here today when the Export-Import Bank of the United States announced it had reached agreement with AFMA (American Film Marketing Association) to provide independent producers and qualified lenders with film production loan guarantees.
This marks the first time the Ex-Im Bank has provided the independent sector of the film industry with the same instruments available to manufacturers and producers of U.S. goods or services for export. The program is expected to increase the number of films produced in addition to supporting job creation in the independent film sector. The production loan guarantees are designed specifically for independent films and not those produced by studios.
The historic agreement was announced at a press briefing by Senator Barbara Boxer (D-California); Jackie M. Clegg, vice chair and chief operating officer of the Ex-Im Bank; Kathy Morgan, president of Kathy Morgan International and chairman of AFMA; and Lewis P. Horwitz, president of The Lewis Horwitz Organization, Vice Chairman of AFMA and chairman of its banking committee.
The structure of the program provides a viable partnership between government and lender interests with producers and workers in the film industry being the main beneficiaries. The independent film industry is responsible for creating hundreds of new feature films each year and approximately 150,000 jobs. Initially, there will be no maximum loan amount. The guaranty can cover up to 90% of the loan amount.
Film budgets from $1 million to $15 million could be proposed although occasionally higher budgets might be considered subject to greater scrutiny being given to producer and major talent fee deferments. Activity under this Ex-Im program could exceed the projected minimum of $100 million during the first year.
AFMA's Morgan said, "This initiative was begun over 15 years ago by Lew Horwitz who recognized the importance of a loan guarantee program for the independent film industry. It is a seminal event that attests to the maturity that the independent film industry has attained over the years. We also owe a debt of gratitude to Senator Boxer for recognizing and supporting this program since 1995. Her commitment to the program has been invaluable and has assisted in making this historic agreement a reality."
Senator Boxer stated, "The Film Production Guarantee Program we are announcing today will create jobs, promote international trade, and contribute to the artistic legacy of American film. It will provide a needed boost to an industry that already ranks among our nation's leading export industries and job providers."
The current effort stems from a fresh look at the issues by Ex-Im's Product Development officials and Lew Horwitz. Working together, they produced the current proposal based on a solution that guarantees the production loan rather than individual distributor contracts that make up the loan collateral.
"The independent film industry depends in large part upon its ability to discount international contracts in order to fund its motion pictures," said Horwitz. "These assets are pre-sales agreements with film, video, television, music and other distributors who agree to take a calculated risk based on their estimate of the value of the rights which they will be granted. What happens to protect American lenders and producers if an Asian country has an economic downturn or a Latin American country devalues its currency? Since it takes more than pre-sales to fund an entire movie, lenders will also lend a certain percentage of that gap as well, based upon their estimate of the value of those yet-unsold rights. While gap financing will not be guaranteed by this program it remains an important part of the funding of independent films today. The ultimate impact will be to provide more and/or larger loans against international contracts to independent film companies thereby moving more money into the economy and resulting in more production and the creation of more jobs."
The proposal ultimately was approved earlier this year by Ex-Im Bank's Policy Committee and has been vetted by AFMA's Banking Committee, a group of leading international bankers.
Ex-Im concluded that financing independent films is similar to financing working capital for companies engaged in the export of capital producer products and consumer goods since both involve secured loans to finance production. In film financing, however, collateral does not consist of accounts receivable, but contractual obligations to pay at a later date based on performance and the delivery of the film negative when the film is made available and placed in bonded laboratories around the world.
"This is an exciting moment for Ex-Im Bank and the independent film industry. As the world's appetite for entertainment grows through numerous new outlets, the U.S. independent film industry is poised to provide quality entertainment to this exploding market," Ex-Im's Clegg stated. "With Ex-Im Bank, they will also have the financial strength to meet world demand while minimizing financial risk to their investors."
The major need for the independent film industry has been to obtain assistance from the Ex-Im Bank to assist in resolving the financing problems of quality collateral used to support production loans. Frequently, lenders are reluctant to advance funding predicated on agreements from certain countries in Asia and Latin America, partly due to concerns about regional economic crises and political risks which have generated defaults.
The model calls for bank lending using foreign pre-sales contracts as security. The loan must be secured by the assignment of all intellectual property rights related to the film and screenplay in all media. A completion bond is also required. Gap financing may be used, but is not covered by the guarantee. A film must have at least an "R" rating. Ex-Im will not censor content. It is anticipated that the program will become operational and go into effect in May.
