Independent film makers find cash tightest in years; woes of Credit Lyonnais scare off majority of lenders.

Independent producers seeking financing for their films are finding the coffers dry. And it hasn't been this difficult for film-makers to get financial backing in a decade, entertainment industry sources say.

"Sources of capital have become extremely difficult to secure," said Stephen Bannon, a partner in Bannon & Co., a Beverly Hills-based bank. Bannon spoke recently at a standing-room-only seminar sponsored by Independent Feature Project/West, an association of independent film producers. The recession isn't the only culprit. Many entertainment companies that supported independent production during the 1980s by pre-buying the rights to their films have gone belly up, and those that survive are being pickier about just what rights they now buy.

"The recession is just the coup de grace," said Christopher Murray, a partner in the entertainment department at O'Melveny & Myers, the downtown Los Angeles-based law firm.

Independents were in their heyday during the mid-1980s. With the advent of the home video and pay television markets, independent producers, distributors and financiers sprouted up all over Hollywood. They were financed mainly by the junk bond market and eager venture capitalists.

"There used to be a million" independent companies, said Caldecot Chubb, senior vice president of production at Beverly Hills-based Pressman Film Corp.

The bottom has since fallen out of most of these companies, Murray said. The reasons for the demise of these companies vary, Chubb said. Some producers had too much overhead and couldn't afford to stay in business, while others made movies people didn't really want to see. Still others couldn't compete for top-name talent on low budgets, he noted.

Many of these companies were distributors specializing in pre-buying rights to independent producers' films, and were an integral part of the complicated process used by producers to secure financing for their motion pictures.

In other words, to get a loan for a film from a bank, producers must first get a guarantee that all of the distributions rights to these films, including such rights as theatrical distribution and home video distribution, will be purchased as soon as the film is completed.

The producers approach various companies interested in buying these rights, after obtaining guarantees for as much as the picture costs to make, minus any financing the producers themselves provide, the producer goes to a completion bonder. The bonder makes a guarantee to a bank that the film will be finished.

Then, the producer goes to the bank for a loan to complete the film. After the film is completed, the producers pay back the loan with the money received from companies that pre-bought the rights to their films. The bank takes no risk.

But, aside from the major studios, there are only three companies left that pre-buy rights to films. These are Los Angeles-based Samuel Goldwyn Co., Los Angeles-based New Line Cinema Corp. and New York-based Miramax Films.

Even the options among the major studios have dwindled. MGM-Pathe Communications Co. and Orion Pictures Corp. are both in serious financial straits and are in no condition to lend to the independents, one entertainment banker said. Century City-based 20th Century Fox Inc.'s parent, News Corp., is taking cash out of its subsidiary, and New York-based Paramount Communications Inc. has not been known to pre-buy rights to films, the banker said.

Consequently, there are only a few major studios left, including Burbank-based Walt Disney Co. and Universal City-based MCA Inc., that will pre-buy the rights of their movies, the banker added.

Another obstacle independent producers must overcome is the skyrocketing costs of prints and advertising. Prints are the film reels distributed to theaters.

Advertising costs, particularly the costs of broadcast advertising, are so high that distributors want to buy all of the rights to the film instead of just some of them. That way, the distributor has more of a chance of recouping all of the money it poured into advertising, said a banking source who wished to remain anonymous.

Thus, producers have less flexibility in seeking distributors to pre-buy the rights to their films. Previously, they could seek a combination of distributors, but now those options are limited, the entertainment banker said.

The problems experienced by France-based Credit Lyonnais has also had a detrimental impact on entertainment lending by banks. Credit Lyonnais has been the most significant lender to the independents during the past five years, but its presence in the industry is shrinking, sources say.

Officials at the banking giant are reacting to the massive amount of money the bank has tied up in financially strapped MGM-Pathe. Credit Lyonnais has lent more than $1 billion to the troubled company and is now tied up in a lawsuit with its former chairman, Giancarlo Parretti.

Other bankers have also witnessed Credit Lyonnais' moves and are being influenced by them as well, said Gwen Field, vice president of production for Hollywood-based Agamenon Films Inc.