 Historical
Perspective
Essentially, a completion guaranty is undertaken
by a financially responsible party, considered creditworthy by banks
and other financial institutions, to cause a Producer to complete
and deliver a film or television production on time and within budget,
failing which the guarantor itself will either complete the production
on schedule (and pay the excess costs required to do so) or repay
the financier(s) their investments, in the event the guarantor fails
to make such timely delivery. Banks and other financial institutions
and other investment entities which finance film and television
productions require guarantys in order to protect their investments
since in almost all cases, the film or television production is
the asset against which they are lending or otherwise providing
funding, and a failure to complete and deliver the production on
a timely basis would significantly decrease the value of their collateral.
While, initially, guarantys were available only with respect to
lower budget films, the entry of other guarantors into the market
in the early 1980’s enabled producers and others involved
in motion picture production to secure guaranties for much higher
budgeted productions than had been previously available. This led
to a dramatic increase in both the number of films utilizing
guarantys
and the dollar volume of guarantys issued by completion guarantors
as they ultimately increase their capacity and thus their ability
to deal with larger budgeted films. With the availability of higher
capacity, even the United States major studios discovered that
guarantys
might have some value for them as well.
Guarantys are traditionally used in the following situations:
(a) To enable a studio or other major producer/distributor to do
“off balance sheet” financing of some or all of its
film/or television production and to shift liabilities with respect
to production costs into future fiscal quarters or even into future
fiscal years;
(b) To provide security to a bank or their financier which is lending
money for the production costs of a film against third party commitments
to pay for distribution rights upon completion and delivery of the
film;
(c) To enable studios or producers to put a third party between
them and a difficult director or star, so that the studio which
will be doing business with that same director or star in the future
is not the one that has to say “no” to requests which
might result in increased cost of production.
As demand for product increased and as producers and distributors
became more sophisticated in arranging their financing, and as banks
became more sophisticated and therefore willing to lend against
third party contracts, the demand for guarantys increased significantly.
Typical Deal Structure
In a typical deal, a guaranty is used in order to secure production
financing for a film. A producer, having secured a screenplay acceptable
director and a t least some of the cast, will attempt to “pre-sell”
some or all of the distribution rights with respect to the film
that he intends to make prior to its actual production. He may enter
into one transaction with, for example, a U.S. distributor such
as Warner Bros., which might distribute the film on a worldwide
basis, or he might enter into a series of transactions with a number
of different distributors around the world for distribution of the
film in different territories and different media. Whether there
is one agreement or several agreements they would have certain common
elements; i.e. a requirement that the film, conforming to the screenplay
and certain technical specification, be delivered by a date certain,
at which time the distributor or distributors involved would pay
a significant advance against the proceeds to be derived from the
distribution of the film in their respective territory or territories.
These pre-sale contracts, assuming they come from creditworthy companies
or are supported by letters of credit, can serve as collateral for
production loans, provided the lender receives assurance from a
completion guarantor that a film, conforming to the requirements
of the pre-sale agreements, will in fact be delivered to the various
distributors by the date specified in the distribution agreements,
thereby triggering the distributor’s obligation to pay the
advance. Without a guaranty, such a transaction would not be viable
in the sense that the banks would not be willing to lend against
a film project without the assurance that the entire cost of the
production had been covered by agreements with third party distributors
and without the added assurance from the completion guarantor that
the film will actually be completed and delivered.
There are many variations of this deal structure involving equity
investments, tax shelter funds, international co-production funds
etc. However, the essence of the guarantor’s job is proper
production underwriting and follow-on production management.
Underwriting Due Diligence
In evaluating a project for which it is considering issuing a
guaranty,
a completion guarantor looks at the underlying documentation (the
distribution agreements, the loan agreements and the agreements
relating to the production of the film) and more or less simultaneously
looks at the production elements (the script, the budget, the production
schedule) and considers the expertise of the personnel involved
in the production.
A. The Documentation
In reviewing the various agreements relating to the financing, production
and distribution of the film, the guarantor is seeking to confirm
that a film, matching the description provided in the distribution
agreement, can in fact be produced. This requires coordination with
the guarantor’s production representatives in order to make
sure that the requirements in the distribution agreement fit with
the screenplay, budget and schedule. In addition, the guarantor’s
attorneys will review the loan agreement, as the lender is typically
the beneficiary of the guaranty in order to determine that there
are no requirements in the loan agreement that cannot be met. The
production related agreements (such as those with actors, directors,
etc.) are also reviewed in order to ensure that the compensation
provided for is consistent with the budget, that the time period
during which the person is obligated to render services is consistent
with the schedule, etc. As in the case of the distribution agreement,
this requires coordination with the production personnel in order
to make sure that the requirements in the various production agreements
comply with the requirements of the schedule, budget and screenplay.
B. Production Elements
The production personnel will review the budget, script and schedule
in order to make sure that a picture complying with the screenplay
and the requirements of the distribution agreement can be made within
the schedule provided and for the amount of money available under
the budget. This often requires lengthy conversations with the producer
and the director as to how certain scenes are going to be realized
and how they plan to produce the film. At the same time, determinations
are made as to the relative expertise of the personnel on the film
in order to determine whether they can meet the sometimes-demanding
schedule. As part of this underwriting process, changes are often
required in the production elements as well as the various agreements
relating to the film.
C. Follow Up
Each production will have a production representative assigned to
monitor its progress in order to ensure that it stays on schedule
and budget and that there are no deviations from the approved script.
The production representative, operating out of the completion guarantor’s
office will monitor daily production reports and weekly cost reports
including changes in the estimated cost to complete. Where necessary,
a production representative may be assigned to go on location or
on the set of a particular production, either from the inception
of the production or in the event we determine that the production
requires closer supervision.
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