Inflation hits indie productions with higher costs

As industry mavens alight on the Zurich Film Festival, escalating inflation costs and rising interest rates are hijacking dreams of a post-pandemic recovery and rebirth. Together, these financing challenges are sitting on top of unstable budgets still coping with COVID-induced costs that continue to send production budgets 10% north on average. 

 Observers need to go back to 1981 to find inflation rates higher than the current 9% to 10% figure across Western nations, while prime bank lending rates are now sitting at 5%-6%, matching 2008-09 financial crisis levels.   

 Take the rising cost of borrowing first, following a decade of extremely cheap money, and the pressure on producers is now acute: “You’ve got to consider that most indie financiers are always looking to lower budgets anyway. Interest is a key cost line that many producers don’t understand or are forced to factor in late in the day,” says Brian Beckmann, CFO of Arclight Films, which is behind Russell Crowe-starrer “Poker Face.” “Now the cost of money has gone up all over the place.” 

 The three key planks of indie film finance, senior debt, gap finance (aka mezzanine) and equity, are impacted in varying ways by rising interest rates. Equity is the least affected, as it exists as hard cash and is left on the table — meaning it’s last to recoup and then shares in net profit points with the producer and talent after the break-even point. While a premium of typically 10%-25% may be added to the principal investment that pays out prior to any subsequent waterfall recipient, neither is typically interest bearing.  

 Senior debt, however, is more sensitive to interest rates, given the time that lending against collateral — including tax incentives, rebates and pre-sales alongside other receivables — can take to be paid back. And gap financing remains an excessively expensive tool for borrowing against unsold territories and future revenue streams (pegging it at 15%-20% plus and now rising), and often used as a last resort by indie producers. 

 Where this leaves traditional entertainment banks is a moot point, as their degree of flexibility is limited by being locked into now-rising rates and the tight strictures of credit committees. “Their rigidity means that the pricing changes constantly and can start at one figure and end up more expensive by the time you close,” Beckmann says. Others concur, with Head Gear Films’ founder Phil Hunt claiming that “there’s never been a better time than in the past 20 years to be a private lender. And as interest rates are going up, the price of a Head Gear loan is coming down to the point that many producers are coming to us first and not haggling as much.”  

 Alongside competitive pricing and speed of decision-making, Hunt points out that given the turmoil in the overall economy, it’s vital for second-tier lenders to play to their strengths: “Banks are typically removed from the day-to-day difficulties facing the production process, while producers need answers faster in today’s climate. And speed is crucial —  I am Head Gear’s credit…

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