FIDEC opened for business just over a year ago with $45.5 million in capital. With its limited partnership, for-profit-only program of guaranteed film and television financing against unsold territories, the mixed-capital operation is providing timely support to producers with international projects and ambitions.

Producers doing business with fidec are not restricted by any form of content requirement nor principal place of business or residency. Quebec producers and distributors are eligible, as are non-Quebec companies with some form of alliance with a Quebec operation, a regional office, or a production or production package with a measure of economic benefit to the province.

Expanding on the notion of ‘a Quebec connection,’ fidec ceo Pierre Leblanc says the connection might be in the form of a coproduction or coventure, a franchise or network or partnership agreement with a Quebec producer or distributor; or in an investment in the form of a production or post-production budget or package.

fidec’s mission is to stimulate economic activity broadly to the benefit of Quebec companies and the province’s production infrastructure, says Tom Berry, president of Los Angeles-based Legend Entertainment.

‘What the fidec program is encouraging us to do is to build a company and use resources for pictures which are not Quebec content,’ says Berry. ‘My company, for example, is controlled by Quebecers, but is not based in Quebec. But fidec is open to doing business with anybody and taking a fairly broad view of the economic benefits for Quebec that result from that activity.’

Jacquelin Bouchard, chairman and ceo of Montreal-based Pixcom Group, says fidec’s participation in the company’s new high-definition tv doc series Insectia is essential because it has permitted the producer to hold on to major foreign sales rights.

Bob Presner, president of Film Finances Canada (1998) based in Toronto, sees fidec as an important new player in ‘the Canadian financing package,’ a new alternative to operations such as l.a.-based Lew Horwitz Organization, films, Independent Film Financing (headed by Laura Polley in Toronto), a changing array of British and u.s. banks, and others such as Alliance Atlantis Equicap in Toronto, which has offered similar services.

‘Leblanc is coming from a very strong place,’ adds Presner. ‘People within the company are very knowledgeable about distribution. And when you consider what they are guaranteeing is repayment to the financiers of shortfalls in sales, it’s terrific to know they have strong people with that kind of knowledge.’

Bruno Dube, the National Bank of Canada’s senior manager, tv and motion pictures, says the bank has made a $7.5-million ‘strategic investment’ in fidec’s startup capital, in large measure because it is seen as a way of rapidly gaining market share.

The bank sees its own interests being served as the production industry deepens its capacity to sell film and tv product abroad, says Dube.

From an independent film perspective, Shimon Dotan, president of Montreal’s Cinequest Films, says presales alone will not generate cash at the bank. Most sales contracts, other than with the big established buyers (the u.s. studios, cablecasters like hbo or networks like cbc) are generally not accepted. Normally, Dotan says, indie movie sales are ‘made one by one and you have to get the optimal price for your product, which is usually after the film is finished.’

Cinequest gap financed three movies with fidec in ’99, Slow Burn, Cause of Death and the remake of the saucy feature The List, all budgeted at around $5 million.

Financial sophistication

Berry says fidec is evidence of a growing financial sophistication in the Quebec production sector. ‘We all tend to talk about crews and [production] infrastructure and labs. We forget that for an industry to really become implanted you need that, but you also need a financial sophistication, a financial infrastructure.’

Clearly, fidec is actively targetting the international market, North America specifically. Leblanc, former head of business affairs at sodec and active in the production industry since 1984, says fidec is looking to develop an international network and is in talks with a u.s. gap financier aimed at developing a syndication partnership on bigger-budget deals.

How it works

In production gap financing, fidec offers:

* a guarantee of up to 40% of the financial structure;

* a maximum of $5 million per project;

* a maximum guarantee period of 36 months; and

* a cap which limits any one company to no more than 30% of fidec’s total capital.

The company’s $45.5 million in capital, in the form of bank guarantees, permits it to leverage its gap investments up to $90 million.

fidec also invests in rights acquisitions by Quebec-controlled companies. The rights acquisition investment is capped at a maximum of $2 million, and there is a cap which limits the per-company investment to a maximum of 10% of fidec’s capital, in current terms, $4.5 million.

As of early February, fidec had authorized more than $30.7 million in gap financing (credit d’anticipation in French) for 16 productions – $20.8 million in nine movies, $6 million in three tv series, $1.7 million in two animation series and $2.2 million in two large-format imax productions.

Leblanc says about 100 applications have been filed to date and 17 new applications are under review.

Some of fidec’s clients to date include Primesco International, Cinequest, Pixcom, Legend, CineGroupe, Filmline International, Telescene Film Group and animation and children’s producer Mimosa Productions.

Marie-Claude Poulin, a former sales executive with Lions Gate Entertainment and Malofilm International, is fidec gap-financing manager. Martine-Andree Racine is manager, project investment.

Typically, fidec gap financing covers 20% to 25% of the production budget. The company looks to 200% to 250% coverage against sales estimates, with approximately seven markets designated as major sales territories, says Leblanc.

Building relationships

Depending on the term or period, the gap loan is outstanding (the ‘model’ for features is normally one year to 18 months, effective on the date of delivery to the distributor or sales agent, and longer in the case of tv). Other fee factors include the percentage of the gap against the overall budget, performance levels and a producer’s track record with fidec, and the number and quality of unsold territories. fidec’s gap fee can vary from 8% to 15%, says Leblanc.

‘We are in a process where we want to build business relations with clients. And the more a client performs, the more consideration he or she will be given,’ Leblanc says.

With more time-consuming package deals, fidec will ask for a fixed setup fee; otherwise there is no fee on a per-project basis.

Once the company makes a firm offer, the client pays 10% (non-refundable), less on larger deals, of the gap amount. All of fidec’s operations, including prime interest rate designation, are calculated in u.s. dollars.

Leblanc says legal fees in Canada are likely to be in the $15,000 to $35,000 range, compared to a u.s. package where the cost is more in the us$30,000 and more range.

In rights acquisitions, the client must make a direct investment, with fidec recouping on a pro-rata basis (its cost or share of the investment), up to the full recovery of the investment. The upside split formula is different and is essentially a matter of negotiation, adds Leblanc.

Technically, fidec can also make equity or quasi-equity investments in companies, but only at the request of Fonds d’investissement de la culture et des communications, a Quebec venture capital company headed by president and ceo Marcel Choquette.

Leveraging sales rights

‘[fidec] is a brand new vehicle for financing on a strictly commercial basis with lots of flexibility. It’s an excellent tool,’ says Pixcom’s Bouchard.

In the case of the $4-million, 13 half-hour hd series Insectia, which will also be down-mastered for ntsc broadcast, Bouchard says Pixcom is better positioned to negotiate with international buyers. ‘It means we don’t have the sword of Damocles over our head and have to sell off rights too quickly. With serious commercial projects, fidec’s role is an enormous help in preserving our copyrights.’

Without a gap component, producers like Bouchard are generally obliged to sell off key upside territories to cover the cost of production. Insectia is being shot around the world over the next year.

Nationality of the copyright aside, producers with no back-end distribution rights historically have been cast as service providers, with profits flowing to other producers, typically their foreign clients.

Leveraging exploitation rights – using a long-term ‘major-league model’ – with higher profits for investors is especially important for Insectia. Pixcom envisions an extended 15- to 20-year cycle of exploitation.

Successful producers build proprietary catalogues which can be exploited over many years, says Bouchard, and by retaining an element of the up-front risk, Pixcom hopes to bring in Telefilm Canada as an equity investor. With a gap arrangement, he says there’s room for other equity investors. Furthermore, he says the federal funding agency has both a cultural and commercial mandate, which includes seeking out a return on investment. Insectia will also be exploited in cd-rom game and Internet formats.

Financing on the series is being arranged with the Royal Bank.

(The initial 13-episode run of Insectia was sold by Pixcom International to some 120 countries, including to Animal Planet in the u.s., La Cinquieme in France, Discovery in Europe and Asia, and Canal d, Radio-Canada and Discovery in Canada.)

Public benefits

vs. market value

Legend’s Berry says one of Montreal’s newer assets is its expanding financial infrastructure, which in Berry’s case includes relationships with fidec and the National Bank.

Berry’s future production plans include Montreal as Legend puts the finishing touches to a two-year, multi-picture framework agreement with fidec participation. Some shooting will take place in Montreal, with a majority of post work done by service provider Covitec.

Berry intends to produce three pictures in the year ahead, in the us$10 million to us$25 million ($14.5 million to $36 million) range. Legend is owned equally by Berry and Motion International.

Berry makes the observation there is an inverse relationship between maximum tax credit benefits and a project’s world sales potential.

The combined Canadian and Quebec content credits ‘grind’ at around 25% of the budget, says Berry. ‘But here’s where things change. We’re focused on the value in the marketplace. Doing things [with the content structure] invariably involves a trade-off. In general, the content rule reduces the value of the project in the market. That’s certainly true of feature films over a certain budget.’

(A content structure requires the production to have a Canadian screenwriter or director, and one of the two leading players must be Canadian. The average value of the combined services credit is in the 6% range, rarely more than 9%.)

fidec asks that producers work with an accredited international sales agent, and then independently verify the agent’s credentials. fidec also performs its own evaluation of a project’s market potential.

‘It’s the nature of the gap-financing game that producers try to push the envelope,’ adds Berry, who has worked with other gap financiers. ‘fidec’s ability to get to the bottom-line value is as good as anyone else’s.’

Berry’s warning for other producers: ‘They are probably hurting themselves if they go into fidec with sales estimates which are outlandish.’

Value in networking

Gap-financing systems can be enormously complex and are based on sliding-scale fee rates. ‘The fidec approach to pricing is relatively simple,’ says Berry. ‘And I think the fidec pricing is a little on the low side of average, or average, which is where it should be, bearing in mind fidec has a requirement [others] don’t have.’ That requirement suggests fidec’s participation is predicated on adding ‘something’ to the Quebec production industry and infrastructure.

‘I think the short answer is that [fidec’s] Quebec benefit requirement is not really that onerous,’ says the producer. ‘It’s something you should be doing anyway, and the deal with fidec just makes you take it a little more seriously.’

Berry says Canada’s production centres should do more than just offer production services; they should work towards ‘becoming a part of a corporate network that makes these things.’

With the benefit structures in b.c., Ontario and Quebec all being roughly equal, Berry says ‘fidec gives you a reason to make the Montreal decision.’ In the highly mobile, hot and cold location business, fidec ‘has the potential to even out the great fluctuations in location shooting. Even in a slow year for Montreal, we have other reasons for being there whether it’s production work or work in the labs, etc.’ adds Berry.

Although not a formal fidec requirement, shooting in Montreal is hardly a constraint, the most obvious benefit being the 68-cent or 70-cent dollar, as well as qualified crews and services.

In Berry’s view, the proximity of Montreal and Toronto means the two cities ‘are almost in the same production orbit’ since it’s easy to fly in talent from Toronto or access a specialized Toronto service.

Berry says fidec’s openness seems to be a smart, calculated move because it should help stabilize business from service partnerships in the financial and production sectors which ‘won’t simply be looking at where does everybody want to shoot this year.’

A new Canadian player

Film Finance’s Presner says fidec is taking an aggressive marketing stance ‘and seems to be competitive in rates – and they are homegrown.’

Presner adds insurance-backed financing products are particularly viable for producers with multi-film packages as opposed to one-offs.

Overall, he says the entertainment industry – production, distribution, exhibition and broadcasting – is healthier than a few short years ago, but competition will also increase.

‘Do I think things are going to get better? I think things are going to get thinner because there are more outlets and more product. I think our Canadian product [particularly tv] is having a very good time in finding markets, mostly due to the quality of our work,’ adds Presner.

Delivered and sold

A completion bond is a guarantee of the completion and delivery of a project, starting in preproduction and ending when the product is delivered, either to a distributor, sales agent or broadcaster.

‘In effect, the moment our obligation ends, their [the gap financier’s] obligation begins,’ says Presner. ‘But the financing element – the bank – needs both our warranties. They need to know the picture will be completed and delivered, and they need to know the picture will be sold.’

Presner says the risk associated with delivery is reduced as producers get better, which in turn often spurs many of the same producers to take on bigger, more challenging projects, where again risk is heightened.

‘Producers by their nature are risk-takers who have asked others to help them with their risk. Bankers are not risk-takers,’ says Presner.

Presner says the predictable outcome of ‘using someone else’s money to make movies’ is that producers have to defer their fees.

However, when Film Finances bonds a picture, he says, the budget must be 100% complete: ‘If it’s not, we don’t have an obligation to complete and deliver. The strike price of the picture must be met.’

And deferrals have to be ‘real,’ authorized, papered deferrals duly contracted, whether it’s a supplier or an equity partner in a profit position.

Bankers seek hook

Starting out, National Bank was specifically interested in developing a distinct market niche through its association with new gap-financing products. ‘We knew gap-financing products were not being offered in Quebec or Canada, only outside of Canada,’ says Dube.

‘We wanted to position ourselves as one of the leaders in the [Quebec] sector first, with the [longer-term] objective of winning a larger share in the Canadian market.’

Dube says there was a crying need for a gap-financing program in Quebec.

National Bank has been active in the film and tv sector for just 30 months, but according to Dube has financed 125 film and tv projects across Canada and in l.a. in the past year alone. He says the bank now has as much as 50% of the production-sector business in Quebec.

‘We knew the film and tv sector is a high-growth industry and there’s room for new players, and we wanted to build partnerships with companies, agencies like fidec or TVA Group.’

In the fidec gap structure, the bank advances some part of the guaranteed gap financing to the producer, who assumes a u.s. prime interest rate obligation, with no additional bank service fees. The financing is advanced progressively on the basis of cash-flow requirements, usually starting at preproduction, with the interest obligation restricted to the current balance.

Presale and

tax-credit financing

As part of the overall production package, the bank can also finance recognized international presale contracts, up to 100% of domestic and international presales in National Bank’s case, and up to 90% of the anticipated federal and provincial tax-credit contribution.

The bank charges a setup fee and risk-related interest on the presale financing ‘based on the quality of the presales: if it’s cbc, it’s a better rate than if it’s a company based in Germany,’ says Dube.

National Bank conducts its own presale evaluation and is present at major markets such as natpe, mip-tv, mipcom, the American Film Market and the Banff Television Festival.

Cinequest’s Dotan says fidec rates were comparable to other offers, and the financier’s location in Montreal made things simpler. The loan arrangements were made with National Bank.

Two of the Cinequest movies were packaged in a single gap arrangement, which didn’t so much reduce charges as make it easier, says Dotan. ‘You can plan ahead and you know exactly what to expect and you know the charges and the margins. It’s better for me, I prefer to work this way.

‘We do not try to make a quick sale to the u.s. because that could be and will be our bigger buyer. If you try to make a quick sale ahead of time you may undersell your film,’ he adds.

Dotan’s partners at Moonstone Entertainment in l.a. arrange a certain number of presales, which he says legitimize the project’s viability in the market.

‘I must say I find what fidec is doing is extremely valuable for the Montreal film market in the sense it brings back home [projects] that usually had to be shot out of Montreal. It closes a circle and affords some kind of freedom and flexibility.’

Cinequest is prepping to produce three films in the year ahead, two likely to be shot in Montreal and a third in New York.

Equity shareholders

National Bank has $7.5 million (almost 17%) of the startup equity in fidec, second only to Quebec agency sodec, which invested $20 million, and Fonds de Solidarite des Travailleurs du Quebec (ftq), which has invested $10 million. tva invested $5 million in the startup while six other wide-ranging Montreal-based companies – Daniel Langlois Investments, Groupe Donald K. Donald/Centre Molson, film distributors Remstar Corp. and France Film, Cinar Corp. and music industry publisher and distributor Rosaire Archambault – have each invested $500,000.