Inflation hits independent production as costs rise

As industry experts shine in Zurich Film FestivalSoaring inflation costs and rising interest rates are hijacking dreams of post-pandemic recovery and rebirth. Taken together, these funding challenges stand on top of precarious budgets still dealing with costs from COVID that continue to send production budgets 10% north on average.

Observers need to go back to 1981 to find inflation rates above the current figure of 9%-10% across Western countries, while rates of major bank lending now stand at 5%-6%, matching levels of the 2008-2009 financial crisis.

Let’s take the rising cost of borrowing first, after a decade of super cheap money, and the pressure on producers is now severe: “You have to take into account that most independent financiers are always looking to cut budgets anyway,” says Brian Beckman, chief financial officer of Arclight Films, who stands Behind Russell Crowe-starrer “Poker Face” Interest is a major cost line that many producers don’t understand or have to deal with late in the day. “Now the cost of money has gone up all over the place.”

The three main panels of Independent Film Finance, Big Debt, Gap Finance (also known as Mezzanine) and Equity, are affected in different ways by higher interest rates. Equity is the least affected, because it exists as hard money and is left on the table – meaning that it is the last time it is compensated and then shares the net profit points with the product and talent after the break-even point. While a 10%-25% premium can be added to the principal investment which is paid before any subsequent recipient, neither carries interest.

However, large debts are more sensitive to interest rates, given the time it takes to pay off lending against collateral — including tax incentives, discounts and pre-sales along with other receivables. Gap financing remains a very expensive tool to borrow against unsold areas and future revenue streams (tying it at 15%-20% plus now rising), and is often used by independent producers as a last resort.

This leaves traditional entertainment banks a moot point, as their degree of flexibility is limited by lock-in at now high rates and the strict limits of credit commissions. “Its solidity means that prices are constantly changing and can start with a single digit and end up more expensive by the time they close,” Beckman says. Others agree, with Head Gear Films founder Phil Hunt, who claimed that “there has never been a better time than in the past 20 years to be a private lender. As interest rates rise, the rate of a Head Gear loan falls to the point that many Producers come to us first and don’t bargain too much.”

Besides competitive pricing and quick decision-making, Hunt points out that given the turmoil in the macro economy, it is critical for second-tier lenders to capitalize on their strengths: “Banks are usually left out of the day-to-day difficulties of the production process, while producers need faster answers. In today’s climate. And speed is critical — I’m the Head Gear credit committee!” Hunt says.

Meanwhile, hyperinflation continues to inject budgets that have been feeling the pressure of rising costs for timber, steel, fuel, electricity, etc., along with global supply chain delays. Line producers report that costs are now 15%-20% higher as fall approaches than they were a year ago. As broadcasting companies and studios continue to push them away at the end of the market, India is being forced to tighten its belts and the economy.

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