On the public and private funding front, the past year saw the overhaul of the Canadian Television Fund and millions in new money added to the mix: tv movies gained $1 million in annual support from Cogeco Cablesystems; kids’, youth and family programming was provided with an additional $3 million in equity investment from Shaw Communications; documentaries gained a $10-million envelope from Astral Communications; the Cineplex Odeon Films/ Alliance deal spawned a $3.75-million feature film marketing fund; and Telefilm Canada announced $30 million to be earmarked for new media.

Provincially, Newfoundland gained a tax credit; a three-year lobby effort by the Alberta industry culminated in a $15-million grant program based on production costs; Quebec’s sodec initiated the $50-million investment agency SODEC-Financiere; and BC Film switched back to loans from a grant program.

Still, demand for funding far outreaches supply as domestic production continues to grow – to more than $1.09 billion in ’97/98 from $1.08 billion in ’96/97. In the same time period, the level of public financing in Cancon projects dropped 3%, and as producers continue to suss out alternative financing opportunities, banks and other financial institutions are reporting increased activity.

The Royal Bank’s media and entertainment division recorded $1 billion in new business in 1998 for the second year in a row. Between ’97 and ’98, the entertainment business at Royal increased overall by 10%, says Robert Morrice, who heads up the division. The Royal’s activity in the Maritimes rose a striking 30% over the past year, with over $100 million in production financed, the same amount recorded in British Columbia.

As Canadian production companies mature and begin to see the fruits of long-running series and foreign sales, capitalization is becoming more viable.

‘This year we are seeing a handful of companies for the first time borrow on an operating line or a corporate line basis,’ says Morrice. ‘They have achieved a level of financial success whereby they are able to secure a facility based on their balance sheet, not on a project-by-project basis.’

The move towards production revolvers as opposed to single-project financing is also noted by Dan McMullen at Republic National Bank. Producers are now able to create global production lines, allowing them to finance entire slates of projects which allows for greater flexibility and predictability in long-term corporate planning as well as cost-efficiency.

Gap financing

With the overwhelming demand on Telefilm and the Canadian Television Fund, Laura Polley of Independent Film Financing in Toronto says producers have been knocking on her door seeking gap financing as an alternative if public monies fall through. Furthermore, as producers try to hold on to as many back-end rights as possible, gap financing has become a popular option.

Toronto production financier Malcolm Silver is also noting increasing interest in insurance-backed deficit financing as a way to increase the level of production at a reasonable cost.

However, the reins have tightened on gap financing after some banks reported big losses and write-downs on their portfolios.

Morrice notes that some of the insurance companies have left the entertainment industry. In December, aig, a New York-based insurance group, pulled out of the underwriting business, and in mid-March, French company AXA Reinsurance, one of the largest underwriters in the gap-financing market, left the industry. In the u.k., some insurers are facing losses of up to $100 million in claims.

‘I think the [gap-financing] structure is here to stay,’ says cibc’s director of entertainment and new media, Lennox Tibbs. ‘It is in the early stage and hasn’t settled down yet. There will be a shakeout and only those companies that really know what they are doing will stay in the game.’

Polley agrees that gap financing will continue to be a viable option as long as it is handled carefully.

‘Gap financing is becoming much more of a business than a gamble,’ says Polley. ‘We are doing our homework to reduce the risks.’

The days of gapping 50% of a production budget are over, says Polley, who is financing roughly 20% of budgets through l.a.-based feature film lender Imperial Entertainment Group. iff prefers to see one presale in place before taking on a project for gap financing.

When analyzing gap deals, lenders are recognizing that the film market value in many territories is unstable and are discounting distributors’ projections more accurately. While Australia, Germany, France and the u.k. remain fairly strong, the American, Asian and Eastern European territories are unpredictable, says Polley.

Another problem is the lack of international recognition of Canadian actors. ‘The key to gap financing is the cast,’ says Polley. ‘There are dollar signs on actors heads and we haven’t nurtured Canadian talent so they have a fair market value. It is difficult to have Canadians lead the cast in gap-financing situations.’

iff is relying increasingly on distributors when making gap-financing deals.

‘Who is the distributor? Will they make the sales when they say they will? Those are the key questions,’ says Polley. ‘It makes sense that the pressure is put on the distributors to perform and meet the numbers they say they will meet, but this is not done often in Canada because the banks do not have the relationships with the distributors. In the future, the banks have to form more relations with the distributors – they are the cash cows, they pay the loans.’

Silver structures his gap deals at less than 35% and works only with experienced producers shooting several projects which can be cross-collateralized.

As opposed to one-off project financing, Silver is also tending to finance the entire slate of companies with three to four projects shooting per year. Silver is also increasingly looking to bring offshore investors into Canadian films, saying that the interest is there.

The smaller producer – undercapitalized and with little in equity – still faces the biggest challenge when trying to finance with a bank. Another challenge is financing development, says Tibbs, an area which is crucial for producers but which banks have shied away from.

Polley says iff is particularly targeting its investment efforts at smaller producers working on a per project basis. Deals are evaluated on the strength of the project while the company track record and experience does not make or break the deal. Most of the films iff finances are in the $3-million to $5-million range. ‘We invest in companies when they are small and nurture them, so by the third film we are working with budgets of $7 million to $10 million,’ she says.

The Royal Bank is simplifying its procedures to become more accessible and cost-effective to meet the needs of lower budgeted programming and one-off producers, says Morrice, particularly as a consequence of the large amount of production being commissioned for specialty channels.

Morrice is also pushing for Revenue Canada to expedite its audits in the coming year so producers can begin to collect tax-credit monies more quickly. While tax-credit financing accounts for less than 10% of Royal’s total financing, Morrice says it makes up as much as 30% of Royal’s portfolio because it pays far later than other sources the bank lends against.