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Reel money is in short supply

Studios are losing their grip on funding once readily available from Wall Street.

July 18, 2008|Claudia Eller and Josh Friedman | Times Staff Writers

The collapse of Paramount Pictures' $450-million film financing deal underscores how dramatically the global credit crunch is prompting weary investors and several industry-friendly banks to shy away from a popular form of funding that has fueled Hollywood's production growth in recent years.

The pullback could set the studios scrambling to find alternative sources of capital to help mitigate risk on their movie slates as filmmaking and marketing costs continue to climb.

With the debt markets depressed and money drying up, studios like Paramount Pictures and MGM -- which for months have been looking to raise new "slate" financing -- could find themselves living on leaner movie budgets, making fewer pictures or turning to offshore sources such as India.

"It's not a great time for the debt markets, especially for the volatile film business," said media analyst Richard Greenfield of Pali Research. Investors, he said, are learning the hard way that Hollywood is "still not a great-return-on-investment business."

Deutsche Bank, which had been working on the Paramount deal, is one of several banking institutions, along with Merrill Lynch & Co. and Morgan Stanley, that have parted ways with their high-profile film financing teams since the end of last year.

Banks and hedge funds have accounted for more than $10 billion in film financing packages since 2004 for major Hollywood studios such as Sony Pictures, 20th Century Fox, Universal Pictures and Warner Bros.

Roger Smith, an analyst at investment research service Global Media Intelligence, agrees. "As an investor these days you don't want anything exotic like films," he said.

Earlier this month, Deutsche Bank abandoned efforts to raise $450 million on behalf of Paramount for 30 films after failing to attract investors for all of the senior debt. As part of the deal, Deutsche was prepared to shoulder $150 million of the senior debt and had arranged for Qualia Capital and other investors to assume $150 million in junior capital. But the deal fell apart when the bank couldn't find takers for the remaining senior debt.

Around the same time, Deutsche parted ways with its film financing team headed by its onetime star banker Laura Fazio, who only a year earlier had been recruited amid great fanfare from Dresdner Kleinwort. A spokeswoman for Dresdner declined to comment on whether the firm was still pursuing film financing deals.

Fazio -- who at Dresdner had worked on several high-profile deals, one between 20th Century Fox and Dune Capital Management, another with Paramount and another between Warner Bros. and Legendary Pictures -- declined to comment.

At least for now, Deutsche appears to be putting its structured film financing efforts in freeze frame, according to people close to the matter.

"We are maintaining our entertainment financing capabilities but are continuing to realign our business in response to changing market conditions," said Deutsche spokesman Ted Meyer.

Paramount said this week that it found the bank's terms too steep and that the studio would increase its reliance on third-party co-financing and strategic partners such as Spyglass Entertainment, which has co-financed several of Paramount's past and upcoming films, such as the recent Mike Myers flop "The Love Guru" and next year's action picture "G.I. Joe."

The collapse of the Paramount deal is just one example of how Hollywood is quickly losing its grip on the kind of easy money once available through hedge funds, private equity firms and other well-heeled investors.

Merrill Lynch & Co.'s prominent banker Michael Blum and his team -- which helped put together multi-hundred-million-dollar financing deals for Marvel Studios, United Artists and the newly expanded company Summit Entertainment -- left earlier in the year. A Merrill spokeswoman said a senior banker who had worked with Blum was still in place. "We still have a film financing team," said spokeswoman Danielle Robinson. But two people at the New York investment bank said that film financing efforts were focused on existing deals rather than new ones.

Morgan Stanley executive director Christine Lavelle, who helped set up a $150-million film financing fund for Paramount Pictures' specialty film label Paramount Vantage, has also left her post. When the deal was announced in January 2007, Paramount said Morgan Stanley "will help us as we grow our business and extend our brand on a global level."

But Paramount Vantage stumbled. Several of the films in the package dubbed Marathon Funding -- including "Babel," "Into the Wild" and "A Mighty Heart" -- were critically acclaimed but underperformed at the box office. People in the investment community said the deal was swooning so dramatically that even the senior debt holders were at risk of not being made whole.

Two people who were shopped the deal, who spoke on the condition of anonymity because of confidentiality agreements, said the deal was offered last summer at a substantial discount.

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