Hollywood Hits Up Wall Street

As film executives continue to bank on the combination of star power and tantalizing special effects, the production costs of summer blockbuster movies, like the Paramount/DreamWorks sci-fi thriller War of the Worlds, continue to soar. The adaptation of the H.G. Wells classic, starring Tom Cruise, is reported to have cost between $125 million and $135 million to make. Increasingly, film studios are turning to Wall Street to bankroll such budget-busting flicks and diversify risk.

Paramount raised $230 million last year to help cover production costs for a portfolio of films expected to be made in the next three years. With the help of Merrill Lynch's global structured-finance division, the studio created a vehicle called Melrose Investors to lure hedge-fund and institutional investors to finance up to 25 percent of Paramount's net production costs for each film. In return, investors will receive up to 25 percent of net revenues generated by each film. Paramount will finance the remaining 75 percent itself, or by partnering with other studios.

While film revenue securitization is not necessarily a new phenomenon, Michael Blum, head of global structured finance at Merrill Lynch, says institutional investors, like insurance companies and banks, are playing a more dominant role in Hollywood financing. "There's an increase in the appetite for this type of asset," he says.

Shareholders invest in a slate of films and choose from different classes of securities that usually include a mix of bonds and equity. "An investor backs a portfolio of films, so the successful ones offset the bombs," says Jay Eisbruck, team managing director of the Asset Financing Group at Moody's Investors Service. Investors will typically know which films, directors, and actors are involved in the films to be made in the first two years of the deal. After that, they rely on studio management to choose new projects.

The most common type of film financing is a line of credit. Marvel Entertainment secured $525 million in non-recourse financing that is backed by production and distribution rights for movies based on their vault of comic-book characters, including Captain America, due out in 2007, and the recently released Fantastic Four. "Marvel is currently pursuing a 100 percent financed arrangement through Merrill Lynch and other investors for as many as 10 films over eight years," says Marvel CFO Kenneth West. It is also counting on a mix of tax savings, direct sales, and promotional tie-ins to finance the films.

With box-office receipts down this year, Marvel will need all the help it can get. As more and more studios look to outside investors for financial backing, the real thriller could be how Wall Street fares in its supporting role. The results could determine how long it remains starstruck. — Jim Montalto

Beyond the Bottom Line

In an effort to show that they can walk the walk on business ethics, more companies are issuing corporate social responsibility (CSR) reports that detail their environmental, labor, and corporate- giving practices. A study by the Social Investment Research Analyst Network (SIRAN) found that 40 percent of the S&P 100 issue CSR reports, up from roughly a quarter in 2002. "I get a new report from a different company each week," says Paul Hilton, portfolio manager at The Dreyfus Corp. and co-chair of SIRAN.

• 1
• 2
• 3
• 4
• next »