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Don’t Look East for Film Financing – Hungary Releases Dismal Projections

by Jeff Steele

If you are planning on shooting in Hungary in the near future you were most likely surprised by the recent comments of a senior Hungarian government official.  The economy was in “very grave situation.”  It sure had an impact on the American markets Friday.

Sad to say but it appears that it’s not just Hungary that has a problem. As posted on SeekingAlpha.com, the biggest Credit Default Swap “spread-wideners-list” Friday includes many of the Eastern European countries. As the table below shows three Eastern European countries have a greater than 20% cumulative probability of default (CPD) as measured by Credit Default Swap prices.

Sovereign Wideners

By David White, SeekingAlpha.com

Already at much higher CPD%’s than Hungary are Greece at 46.74%, the Ukraine at 34.65%, Portugal at 26.04%, and Latvia at 24.22%.

As stated by Peter Boone and Simon Johnson in a recent blog post in the NYT “If world financial markets once again decide their risk appetite is low, many unsustainable leveraged institutions and governments are in for a tough ride.”  This is especially true for many Eastern European countries.

They go on to say that The EU has made Spain the “Maginot Line” for the Credit Crisis but that it is not likely to hold (again).  If correct, this bodes ill for Eastern European countries as they seek their own financing.  While Spain is certainly sitting in the crosshairs of default, it may nonetheless have the resources and wherewithal to actually weather this crisis, if they markets will give them enough time to “quickly” turn things around.  Ireland and Eastern Europe should keep a crash cart nearby, since they’re going to be rooming with Greece and Portugal in credit ICU.

For the indie filmmaker, this is a blessing if you’re planning to shoot in the Eurozone, but it’s a curse if you need to pre-sell territories to finance your budget.  It’s a blessing if your investors are USD; it’s a curse if they’re not.  It’s not all bleak: presale transactions are still closings, so that’s good news – this can be evidenced by Comerica’s entertainment division having had their best performing years in 2008 and 2009.

If you really want to play it safe: shoot in the USA.  Louisiana is still your best bet, with their 85 cent buyback provision.  Pennsylvania is canceling their program.  Michigan’s application process is moving at glacier speed (but where else can you buy a house with your per diem?)  In a time of so many losses, I would steer clear of transferable tax credit states and stick with rebates.  I’m still not convinced that tax credit insurance is worth the price. 

11 Responses leave one →
  1. Shawn permalink
    June 14, 2010

    Jeff, You blog is one of the most helpful tools out there. It keeps current tabs and readings on the barometer of film finance. Thank you. Keep posting!

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  2. Pierre Lapointe permalink
    June 14, 2010

    Where can we shoot anymore to get any kind of tangible incentives?

    I’m developing a period action-adventure TV series and was eying (dubiously though I might add) the Czech republic and especially Hungary since there has been considerable investment in the infrastructure there (Raleigh studios built some spanking new stages and have camera, grip and electric services), but that seems much less likely now. What a shame! So now, back to Spain, France, Italy? How secure are those incentives?

    Also developing a dramatic series that would be shot in Michigan. My greatest concern there was infrastructure and crew depth and because of that the purported 40-42% state incentives tumble considerably if you can’t secure local vendors, crew and/or talent. Not only do the value of the incentives go down, your costs go up because you have to import! Put that on the shelf for now.

    Louisiana? Well, with the BP catastrophe hitting the whole region, I’m not so sure about its economic stability in the coming months/years!

    Producers supposedly need 15-20% of their financing from these soft-money sources though I would be curious to see if historically incentives have lived up to their promise.

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    • Jeff Steele permalink
      June 16, 2010

      Pierre,
      Just to clarify, Eastern Europe is a great place to shoot because the rising dollar and tumbling Euro are working to your advantage. It’s the pre-sales that you may or may not need to finance your film that are going to get tougher.

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  3. June 15, 2010

    Jeff,
    Jeff,

    I disagree with your opinion that producers should stay away from transferrable tax credit states. We have been selling the Puerto Rico tax credits (40% of all payments to Puerto Rico residents, everything not just labor) at an average of 90%, many times at 92%.

    BTW we are USA and have the crews to handle various projects simultaneously. And it is Paradise.

    Thank you for your blog. See you soon.
    Saludos,
    Antonio

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    • Jeff Steele permalink
      June 15, 2010

      Hi Antonio,

      You are correct in that the generalization is always disproven by the exception — and Puerto Rico has had a consistant market for their credits. My concern, however, has more to do with (i) general senior lender unwillingness to finance transferables (though any number of mezz/tax credit lenders (e.g. Winchester Capital, Sakonnet, etc.) will readily advance against them, and (ii) the time-risk of transferables. For the latter, (in today’s financiual climate) there’s a market risk in the 9 months to a year that it can take to get your credits certified. Trasnferable credits may be selling well today, but a year from now that may or may not be the case. In these topsy-turvy days, my guiding mantra is risk mitigation. I think there is too much market risk in transferable states. That being said, if I needed to shoot jungle/tropical, I would still opt for PR (over HI or FL), because HI and FL are statutorially riskier (and less consistant.)

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  4. June 15, 2010

    Canada has some great tax credits as well that are actually just rebates on foreign investment. Most independent producers also think that these require Canadian content to apply – this is not the case and I would urge producers to do their research as Vancouver is once again on track to have a pretty good year servicing US and International films.

    Great post Jeff!

    Maybe crowdfunding can help part of this problem? We hope so….

    Cheers

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  5. June 17, 2010

    Last night at dinner, I had a round table discussion with industry friends who really wanted to learn more about Louisiana and it’s tax incentive program.

    Pierre, Don’t be concerned about the Gulf/BP disaster affecting the economic landscape of the tax incentives program. Louisiana will do just fine. While a disaster on many levels, the Gulf will always survive.

    However, with that being said, the media attention is acidic once again down there. First came Katrina. Then the levees broke. Then Rita (that 2nd hurricane people forget about). More flooding. The Superbowl Champions New Orleans Saints (Geaux Saints!) and now … the BP/Deepwater Horizon disaster.

    In all my life I’ve never seen Louisiana get this much attention. Well, except for the past crooked politicians.

    At this dinner, I opined THE best thing the Louisiana Legislature did last year was ‘firm-up’ the tax incentive program and increase the benefit. AND it now offers an 85% – 85 cents on your dollar-spend in La. (above $300k/yr. total) – buyback program. You can still market your certification credits in Louisiana, though now with the buyback program, I would say you have a little more insurance to count on.

    Two of the hottest shows on HBO right now are “True Blood” and “Treme.” Produced in Louisiana. The funniest feature I know of shooting now down there is “Battle Los Angeles.” (A Marine platoon faces off against an alien invasion in Los Angeles.) Never thought I’d see the day a film which takes place in Los Angeles would be shot in La.

    Now, this is where I was looked at with the ‘evil eye’ by my Louisiana native friends last night. I said the problem with Louisiana is there are not enough skilled crew talent in the state, almost non-existent post-production facilities and limited production equipment. They knew I was right but, didn’t want to admit it.

    Funny thing is, all of them are moving back to New Orleans to take advantage of the production boom, which lacks…

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  6. June 17, 2010

    … here in Los Angeles.

    Oh, and Jeff, thanks for the space to give my opinion.

    Even though sometimes I shudder when you send out a new post about new hurdles in financing and distribution.

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  7. Scott Hillman permalink
    June 23, 2010

    I realize i am writting this late but i realize its important.

    KEEP SELLING THE MOVIE

    its important that hungry and other countries like it have a viable, *legal* independent film market out there. You maybe making pennies on the dollar here, but in 10 years the crisis will be over. If by then only the big studios are selling the movies there, or only worse the pirates, do you think you as a filmmaker is going to have an new in.

    If the culture is such like in spain piracy is prevalent people don’t make there movies availbe legally, piracy might as well be legal. While there is a lot of piracy in the east, you want to keep the legal option open

    The guy who buys your film for pennies-he doesn’t necessairly have to exist. He depends on you selling him the film as much as you do.

    Film is a semi unique industry-all our real cost is upfront. As a distrubor you can’t loose money selling to a new market. Its always going to be in the intrest of the indie filmmaker to sell his movies overseas. You need them to know its there.

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  8. smartfilms permalink
    July 13, 2010

    great discussion. Could someone guide me to understanding transferrable tax credit, tax rebates and how and when to utilize them. any learning links? thanks Filip

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