Hollywood has been forced to face up to the tough reality of the credit crunch as a slew of film projects are expected to be forced on to the back burner because of tough new funding terms set by Wall Street banks.

One senior executive at a big Hollywood studio, who declined to be named, predicted that the increased cost of financing the film industry would lead to fewer movies being made, particularly by smaller, independent companies.

He said: “Deals are hard to get done right now. This is just how the banks are dealing with uncertainty. They are being very cautious.”

Although a number of the leading studios, including Fox, Universal and Disney, managed to raise funds before the credit crisis began, it is predicted that many independent film-makers will not have had similar luck.

The executive said: “Fewer films is not necessarily a bad thing - people have only so much money to spend at the movie theatre - but what you will see, increasingly, is film companies going to India and the Middle East for their funding.”

New York investment banks have become a key source of funding for Hollywood only in the past five years. However, studios such as MGM, Fox, Universal and Sony quickly began to rely very heavily on Wall Street for the financing of new films.

Since the credit crisis erupted last year, investment banks have increased the cost of lending for the studios and, in some cases, banks have pulled out of film finance altogether.

Other areas of contention are distribution and marketing fees, according to the executive. Typically, a studio and a bank split the cost of a batch of films equally and share in the profits once the movie is shown in cinemas.

However, a film studio can delay paying its share of the profits from a new film back to the bank by agreeing to recoup the cost of advertising or distributing the film first. Now banks are reducing the amount that a studio can claw back before repaying the lender its share.

Last week it emerged that Deutsche Bank had closed its film finance unit and pulled out of a $450 million (£225 million) loan to back 30 films in the pipeline at Paramount Pictures.

It is understood that Viacom, the owner of Paramount, chose not to take up Deutsche's loan after rejecting the increased cost of the financing.

Although European investment banks funded Hollywood for far longer than Wall Street banks, it has also emerged that Dresdner, the German bank, has completely withdrawn from film financing.

The Paramount deal would have paid for a portfolio of new films, including Tropic Thunder, featuring Ben Stiller, and The Curious Case of Benjamin Button, starring Brad Pitt.

The executive said: “I don't think the issue is that banks are pulling out - they always come back when they think the terms are right. The real issue is the way that they are structuring the deals right now. It used to be the case that the equity and mezzanine part of a deal were the hardest bits to raise, but now there are problems even with senior debt terms, which get paid off first.”

Fox, Sony, Viacom, Warner, Deutsche and Dresdner all declined to comment.

In the business

Getting out of film
Deutsche,
Merrill Lynch and
Morgan Stanley...
...are all believed to have parted company with their film financing teams

Staying in film
Goldman Sachs,
JPMorgan Chase and
Elliott Associates (New York hedge fund)...

$10bn
Amount of money Wall Street and hedge funds have lent to Hollywood studios since 2004

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