Montreal: Canadian producers are looking for credible ways to build foreign financing, which has come under increased pressure in the past three years. Foreign revenues for Canadian productions as reported by CAVCO (source: CFTPA/APFTQ Profile 2002) has declined to $384 million in 2000/01 from $536 million in 1998/99. In the same period, international presales and distribution advances declined more than 25% to $58 million from $80 million.

On the other hand, foreign producers are also looking to Canadians to coventure and coproduce, and the early service outlook for 2002 partly belies last fall’s pervasive ‘doom and gloom’ reports.

Revenue potential for all kinds of film and TV product is down in today’s soft market, partly a result of oversupply, says Stuart H. Cobbett, managing partner, Stikeman Elliott in Montreal. ‘And you’re talking about a heightened conservatism among financiers…and there are now fewer financial institutions active in Quebec, or active in Canada, I would think.

‘If you are looking at a bigger-budget project, fundamentally you have to either have a U.S. distributor or a whole lot of money coming out of foreign territories,’ says Cobbett, who primarily represents lenders (banks) and equity investors.

Cobbett says the Export Development Corporation, as a guarantor of foreign receivables, has emerged as a more active player in the A/V sector.

Michael Hirsh, CEO of Nelvana, a Corus Entertainment company, says good opportunities exist in Canada despite audience fragmentation, but the biggest changes are international.

‘The metrics and economics of our industry are in the process of flux and change. It has to do with the international consolidation [such as] Disney buying Fox Kids International [and] the monetization of [programming] blocks where Fox Kids was auctioned off and NBC sold their Saturday morning block to Discovery Kids.’

The old models are no longer effective, says Hirsh, and producers need to be more mindful of reducing costs and the obligation of delivering high-quality, innovative ‘event programming.’

Specialized financing

Specialized financiers like Independent Film Financing and FIDEC offer producers creative solutions, and are better positioned for risks than banks.

FIDEC requires a limited element of Quebec content, but has serviced production-service deals that shoot in the province.

The agency recently added short-term, bridge-to-bridge financing in cases where a producer has an offer from a bank but the bank hasn’t advanced the money.

Pierre Leblanc, managing director with FIDEC in Montreal, says there are fewer international buyers and the capacity to pay in markets like Germany, Japan, France and Italy is down. He says this puts pressure on producers to deliver shows ‘which are well-targeted to buyers. Producers must now know who they expect to deal with and offer top-quality products.’

Leblanc says the upper limit of gap financing has declined in recent years to 20% of the budget for feature films and as low as 10% to 15% for TV productions.

A new partnership proposal

Laura Polley, president of Independent Film Financing in Toronto, exclusive representative in Canada of Comerica Bank, says tax-driven financing is fundamental, even as it moves from country to country.

‘Tax-driven financing out of Canada is not enough, but it is very difficult for Canadian producers to produce strictly out of their own country. They have to form partnerships,’ she says.

Polley, who specializes in gap and coproduction arrangements, says it’s time the industry looked at establishing a mixed, public-private gap-financing partnership, anchored by a bank active in gap financing and Telefilm Canada or some other federal agency.

With shared risk and expertise in the market, Polley says, ‘I think this could be a commercial fund for the government because the banks don’t like to lose money. Similar to what FIDEC does, for example, this would be a federal fund. And [government] could actually make some money and the commercial fund could feed a Canadiana fund.’

And a new mixed entity would have more leverage than the producer, Telefilm or the institutional bank to keep up pressure on international sales agents, making sure they deliver against projections.

Better than predicted

The service outlook for 2002 is tentative, some say day-to-day, but basically positive.

‘So far it hasn’t been the apocalypse some people were predicting. On the other hand, we can’t minimize some of the negative pressures [cutbacks in U.S. network orders, consolidation, etc.] that are out there,’ says David Zitzerman, partner, Goodmans LLP in Toronto. ‘It’s only March but so far we’re off to a much better start.’

A newer production structure attracting industry interest, especially in deals with American partners, is the CRTC Co-Venture (Definition of a Canadian Program/PN 2000 – 42), says Zitzerman.

This special definition of Canadian TV content establishes the criteria for a joint venture between a Canadian producer and any foreign producer, independent of the 57 international official treaties.

In the case of a coventure with a U.S. partner, the American party can hold a copyright interest, be ‘openly credited’ with producer and exec producer credits, as well as obtain a larger piece of distribution rights. The program fully counts as Canadian from a licensing perspective, but is produced through the production service tax credit, says Zitzerman.

In this structure, the 6/10 content rule and 75% spending test still apply, except in the case of a coventure with either the U.K. or France, where the minimum content stipulation is reduced to 5/10 points and expenditures to 50%.

‘The advantage is that you can have the open involvement of foreigners like Americans who can be hands on. It’s becoming more popular and we’re seeing more clients doing that particular structure,’ adds Zitzerman.

The era of the shadowy showrunner may not be completely over, but Zitzerman says increasingly U.S. clients seek up-front, transparent business arrangements and have ‘a lot less appetite than in [the past] in participating in anything overly aggressive when it comes to Canadian content. They don’t want to sign side letters or do side deals.’

European financing

Montreal entertainment lawyer John Buchanan says the lack of an amended coproduction agreement between Canada and the U.K. has led to a defacto tightening of rules on the U.K. side.

Buchanan says ‘the crackdown’ has keyed on U.K. producer deferrals, increasingly the subject of stringent audits by accountants.

The optimal deal structure implies filming in Canada, accessing both the maximum of Canadian tax credits and the U.K. tax deal. ‘It is difficult to do a minority [Canadian] coproduction, because the question becomes what elements are you going to bring to the table if the film shoots in the U.K.,’ says Buchanan.

Zitzerman says the revision of the German media decree has created ‘bad tax problems’ for investors. This has led to a significant drop in official Canada/Germany coproduction (an exception being the new $35-million Minds Eye deal with H5G5 Media AG). New German business is moving in the direction of film-sheltered deals, often U.S. and studio originated with the outright sale of the copyright to the limited German partnership, and Canada supplying the location or service shooting component.

Sharing the risk

Joanne Gordon, national market manager, media and entertainment group at RBC Royal Bank in Toronto, says gap-financing activity is likely to increase this year. The bank is ‘very selective’ when it comes to projects not fully financed, she says. ‘Certainly the Royal Bank, with respect to its existing clients, will try to partner with the gap lenders in order to bring deals to a financial closing.’

Gordon says there is no major change in the bank’s perception of buyer contracts. The bank has access to public information on international buyers, and in other instances, goes directly to the third-party source for financial information.

Also closely associated with Canadian and international lenders, Carolyn Stamegna, partner, Gowling Lafleur Henderson LLP in Toronto, says tough market conditions and industry consolidation has spawned widening risk allocation, and licence and distribution contract requirements have deepened.

Multiple sources of financing has led to more coproduction and more co-lending, in short, more complications. ‘We are constantly trying to interface competing interests in a single project,’ says Stamegna.

‘As a consequence, we are now dealing with risk allocation between lenders and between lenders and buyers, because buyers are much stricter on what they require before they will pay out. From a documentary [paperwork] point of view, the buyer’s credit history comes more into question.’

Stamegna says the preconditions for buyer payout is higher than in the past, beyond the traditional physical delivery of the exploitable material. ‘Buyers are now saying, ‘I want everything in my deal or I won’t pay.’ That means the risk attached to the paper, the underlying licence or distribution agreement, is higher.’