Q&A: with David Grover, head of media finance, Structured Finance department, ING Bank, Amsterdam
With the Euro in crisis, funding of content is more challenging than ever before. David Grover, the man responsible for giant ING Bank's media lending in Europe, takes a look at what’s in play when it comes to banks funding content now and in the near future. Grover’s clients include, among others, Zodiak Media, Russian World Studios/Sistema Mass Media, Digiturk, Sanoma/SBS Broadcasting, Canal Digitaal, and Zed Spain.
Q. It’s not a pretty picture for European media companies, large and small, that want to fund content these days, is it?
A. Well, it’s not all doom and gloom but banks are placing more scrutiny than ever before when making lending decisions and the media sector is not immune.
Q. So what does it mean for the media sector?
A. It means that media players that want to raise money have to come to the banks with conservative business plans. Banks have capital to lend. In fact the way out of this pickle is to lend more but, and this is significant, to lend “intelligently” more! Banks will want to be as sure as possible they will be repaid at the end of day.
Q. Who’s getting the loans and who’s not?
A. The most difficult media sector to finance currently is film. Banks got burned badly over the last three to four years; so much so that a lot have closed dedicated film-financing units and integrated what’s left into the general media team. The end result is that unfortunately the expertise that was once there is slowly being lost. European banks are pretty much at a stage where only hard-receivables, or bonded films, will be financed and for shorter periods of time, as an example 12-18 months. This kind of receivables financing is still the bread and butter of banks, by the way.
Q. Any chance of this picture changing in the next few years?
A. That’s a difficult question. There should be almost a complete rethink compared to how films were financed previously. In the past, limited success was had with slate financing structures, where banks lent for a series of films, with the intent being that this would cushion the blow from a dud. Also, the banks would take security over a library of already-produced films that were still generating income, and this cash flow would service the loan before the new films were up-and-running. If things didn’t pan out, the banks could seize the film library and hopefully not lose any money. This structure served people pretty well in the good times, but during the bad times, there turned out to be structural flaws. For example, producers could still “bet big” on one film and that could tank the economics of the whole slate.
Q. So what’s the solution?
A. It’s not glamorous but I think it’s a case of “slowly-but-surely.” As a group bankers need to stay engaged with the industry and hopefully we can come up with some ideas together. At the end of the day it’s about relationships and whether you trust that person to do all in their power to pay you back.
Q. What about financing TV content? Is that a more hopeful picture and if yes, why?
A. TV financing is looked upon a bit more favourably, with banks willing to take a portfolio approach on the larger production companies, in other words, cash flow based lending that is not tied to a specific receivable or project. Also, TV-production spend is done in more manageable chunks, and the production cycles are shorter than for films, so it’s easier for producers to build a good track record, and easier for banks to monitor. For example, we have one client with about 300+ productions going on at any one moment, so it would be too difficult to track things on a per-production basis anyway. In this scenario, it’s not a big worry if an individual production doesn’t get renewed. These companies also have very flexible cost bases and that means new productions can ride the success of the current ones. Additionally, the larger indies have well-established relationships with the major broadcasters and this counts for a lot.
Q. What about smaller and medium sized producers that have limited portfolio and limited funding to acquire more portfolio? Is there any way around their dilemma?
A. I think creative solutions in this area are really needed. It is true that it is still tough for European banks to finance the smaller and medium sized producers that are looking to expand organically or through acquisition. There is still too much perceived reliance on a single hit or too much key person risk, such as a CEO with good connections, or a two to three person creative team, and banks are not willing to take a lot of series-renewal risk. It’s hard to get around the fact that higher-risk business plans are not suitable for bank capital. They require high-risk, high-reward capital, such as equity and mezzanine that offer investors the potential for a higher return if things go well.
Q. So what is the creative solution?
A. Well I do think that banks can try to streamline things so that producers get credit for all of the valuable things they have when they come to the banks, as an example, rights portfolios, distribution contracts, ancillary revenues, etc.. The closer we can come to placing a defendable value on some of these items, the more a bank can lend.
Q. What do you see as some of the main hurdles in the business of funding content in these particular financial hard times?
A. One significant hurdle is the intangible nature of production financing; intellectual property is classified as an intangible asset versus a tangible asset such as a building. The credit committees of European banks tend to prefer tangible collateral – you can touch it and feel it – even though, historically, recovery rates on loans secured by tangible versus intangible assets do not vary by much. It’s more of a mind-set.
Q. What needs to be done by players in the industry to help make the lending picture more favourable?
A. Bankers see that distributors that do not have a solid content control strategy are at a disadvantage in that they are unable to capitalize on internet/mobile rights, catch-up TV, etc. We expect them to get more aggressive here in picking up rights. That may help independent content producers to begin to put a value on distribution rights that were previously hard to value. As an example, one idea is maybe there is a way a lender could look at a client’s Netflix and iTunes sales data to see how much revenue was generated on Series 1 to get an idea of how much money you would be able to lend for Series 2 if you had Series 1 as collateral. This is a whole new revenue stream that I don’t think has been exploited on a per-production basis when trying to unlock value that bankers can lend against.
Q. The film industry unlocked bankable value through the concept of ultimates. Can that be applied to TV?
A. Ultimates was the idea that you could predict what a film would ultimately make over its entire lifecycle based on the its first few weeks of box office revenue. The industry could look at developing a TV series ultimates based on the idea that internet sales and rental portals are becoming increasingly TV series focused and less film focused. That’s a big change over the last couple of years! For example, when Netflix started out, it was largely a film rental business, but now on both iTunes and Netflix, TV series purchases and rentals are outpacing film viewing, so a lot of TV production debt capacity is probably being created here.
Please note: the views expressed by David Grover are his, and his alone, and do not reflect in any way the views of ING Bank.