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The risky biz of completion bonds; producers shop for lower fees.

Producers are using completion guarantees as part of the collateral they put up to get either the bank or other financing sources to release production monies.

These completion guarantees are tied to distribution agreements provide that payment will be made upon delivery of the completed film. Typically, the bonding company issues guarantees that the picture will be completed on budget and schedule - or it is obligated to pay the amount over budget needed to complete the film. In the rare instance that the completion company elects to abandon the film, it is liable to the financiers for the total extent of their investment in the film project.

Downward pressure on film budgets is continuing to be felt by producers, who are fiercely shopping around to get better percentage rates, and in some instances, flat fees, on charges for completion bonds. A glutted market makes this shopping frenzy possible. This happened in the last decade, when the completion guarantee became a central element in the financing of motion pictures.

Higher risk is the name of the game for bond companies in the 90's. High production costs and a relatively large volume of business (approximately 80- 100 films in 1991 for two of the three major bonding companies) increases the exposure of these guarantors to the 100's of millions of dollars in annual aggregate liability. They limit this risk by making an arrangement with large deep-pocketed reinsurance companies like Lloyd's of London does for Film Finances and TransAmerica for Completion Bond Company. In practice, this works well, as long as the bonding company issues bonds with "cuthrough endorsements." Increasingly, they omit this provision, which could mean that the deep-pocketed reinsurer is off the hook for claims against the bond.

Of the three major bonding companies, (Film Finances, Completion Bond Company and International Film Guarantors (IFG), IFG is different because the Fireman's Fund (the major North American insurance company owned by Allianz of Germany) is directly liable to the motion picture financier as opposed to the bond guarantor.

Competitive downward pressure on fees, as low as 2-2.5 per cent of the budget for films over $20 million, is causing several of the bonding companies to become more innovative both in terms of taking on more risk (i.e. Film Finances' willingness to issue more bonds while keeping very tight reins on expenses) and offering more value to the producer per service purchased. Today's preferred marketing approach is to network resources, so as to help the producer get the film made.

Richard Soames, founder of Film Finances, said his company, "is well-equipped to quickly respond to producers' needs." In-house legal expertise is readily available to revision demonstration and speed the production along.

Jason Zelin of Completion Bond Company added that they are eager to assist producers in obtaining financing by qualifying them with the banks. The bank makes an independent determination to extend credit to the producer. "No additional fees are contemplated for this introductory service," stated Zelin, who declined to answer any questions about the takeover by Completion Bond Company of Spike Lee's Malcolm X project.

Internationally, Film Finances is the dominant player, although Completion Bond Company is planning a series of international joint venture arrangements with foreign-based domestic bonding companies.

Anne St. Johns of IFG is encouraged about business conditions which appear to be turning towards stricter underwriting by guarantors. St. Johns pointed to IFG, where stricter underwriting and controls have enabled the company to avoid losses and bring all films to date, on budget and on schedule.
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Tasca, Eileen
Publication:Video Age International
Date:Apr 1, 1992
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