REELING IN THE MONEY; BANKS INVEST IN BIG-BUDGET MOVIE DEALS.

Byline: Dave McNary Daily News Staff Writer

Major banks have decided the movie business makes increasing sense as an investment and are competing to provide new financing packages for the major studios, investment bankers report.

The key motivation for studios - which begin their crucial summer season today with Universal's ``The Lost World: Jurassic Park'' - and their parent companies is reducing their direct investment in new productions at a time when the costs of getting movies made is soaring.

After ``Lost World,'' 10 other films each with production budgets of at least $60 million and likely marketing costs up to $40 million will open before August. The average cost of making a movie rose 6.5 percent last year to $39.8 million while the average cost of marketing and advertising increased 8.7 percent to $19.8 million.

Universal Studios is widely believed to have recently reached an agreement in principle for a $1.1 billion, three-year package from Citicorp to fund up to 60 movies, similar to a $1 billion package arranged last year by Citicorp for 20th Century Fox.

Additionally, CS First Boston has arranged several financing arrangements for Walt Disney Co., and ING and Sumitomo combined on a $300 million financing last year for PolyGram's Gramercy production-distribution arm. Banks provide some of the funds for the loans and then arrange for the rest through investors or other banks.

``Studios are trying to spread the risks,'' said Arthur Rockwell, an entertainment analyst and director of research at Yaeger Capital Markets in Los Angeles. ``We're seeing it because some of the traditional financing has dried up and the risks of individual films are now greater.''

``This kind of arrangement will be something that every studio follows,'' he said.

John Nendick, a partner with Arthur Andersen's entertainment group in Los Angeles, agreed that such arrangements likely will become more popular. ``Generally, the business is becoming more and more capital-intensive, so this kind of financing is a way of sharing the upside and downside with a third party,'' he said.

The Fox and Universal deals, called off-balance-sheet financing arrangements, provide for the studio to take the anticipated value of future films and package them to offer to banks and investors as units of the entire group of films. The money is available to the studios through a shell company's credit line and is used to finance production.

The special-purpose company also owns the copyright to the films and leases the distribution rights back to the studio. The funds do not cover marketing and distribution costs, which are paid by the studios.

The banks and investors earn money from part of the revenue returned to the studio from domestic and overseas ticket sales, home video sales and other subsidiary sales.

Studios have used a wide variety of methods to raise funds, including simply obtaining the money from corporate parents; co-productions, which are becoming increasingly popular, such as Paramount and Fox funding ``Titanic''; prerelease sales and licenses in foreign markets; and tax shelters and limited partnerships, such as Silver Screen Partners, which have mostly disappeared because of tax law changes.

David Davis, an entertainment analyst with Los Angeles investment bank Houlihan Lokey Howard & Zukin, said the Fox and Universal deals reflect the increasingly tough economic climate of filmmaking with increases in costs having outstripped revenue gains for several years.

``Historically, Hollywood had free rein in how it financed films because it was a really profitable business,'' Davis said. ``A lot of the deals were tax-driven, so the investors didn't really care whether or not the picture made money, but that has changed. Deals now have to have economic value.''

Fox and Universal's loans carry several benefits for their parent companies - News Corp. and Seagram Co. Ltd., respectively. They allow parents to spend internal funds on more potentially profitable ventures such as television and eliminate the need to go to markets to raise money.

Additionally, films' performance becomes less disruptive to earnings since the results are reported by the shell company's quarterly contribution of the pool of movies.

``This is occurring because the banks want to make money,'' Rockwell said. ``It's creative financing on their part.''

For the banks, the financing represents a return to Hollywood after their industry saw poor returns in the late 1980s and early 1990s from backing several high-profile independent producers, including Golan-Globus, Dino DeLaurentis, Jerry Weintraub and Carolco. When those companies fell apart, bank financing dried up for several years.

Rockwell noted that the banks are not particularly at risk in the new arrangements. ``Banks, generally speaking, know how to protect themselves,'' he said.

Nendick pointed out that financing for the smaller ``independent'' studios has become far easier to obtain recently with banks willing to provide ``gap'' financing, or the difference between the projected budget and what producers can hustle from sales of distribution rights.

To Chris Lanier, head of the Motion Picture Intelligencer forecasting service, the trend toward risk-sharing is an indication of a deeper problems - declining profitability. ``If studios are making so much money, why are they so interested in giving up a piece of the profits?'' he asked.

CAPTION(S):

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Drawing: (Color) HOW FILMS ARE BEING FINANCED

Banks have started to provide new financing packages for major studios, which are looking to reduce direct investment in new productions due to the soaring costs of making movies.

Len De Groot/Daily News