Hollywood financiers’ role gets a rewrite

During the 23 years that Clark Hallren worked at JPMorgan Chase & Co., the investment bank went through so many incarnations that the former managing director of the institution’s Los Angeles entertainment group jokes that it earned him a reputation of being a “vagabond.�

JPMorgan isn’t the only thing that underwent tectonic shifts during Hallren’s time at the bank, which for years has been a leader in arranging financing for such Hollywood studios as DreamWorks, MGM, Sony Pictures, Warner Bros. and Lions Gate Entertainment.

In the aftermath of the global recession and downswing in the entertainment business, far fewer banks are lending to Hollywood. Where once some 40 lenders vied to lend money, it has now dwindled to 10 to 12, said Hallren, who left JPMorgan last year and launched Clear Scope Partners. The Century City firm, backed by Suhail Rizvi, advises clients on raising capital and debt as well as building business models (Rizvi also owns a controlling stake in talent agency International Creative Management).

It’s a big switch for Hallren since the heyday of big Hollywood transactions when he worked on the initial public offering of DreamWorks Animation in 2004 and the $4-billion debt offering to finance the purchase of MGM in 2005 by an investor group (now in perilous straits). Since going out on his own, Hallren has been raising financing for Evergreen Films, a new 3-D production company; advising Los Angeles independent production company Odd Lot Entertainment on its domestic distribution strategy; and securing financing for digital production house Crest Animation Studios.

Company Town recently talked with Hallren about what it’s like to be a Hollywood banker in harder times.

How different is the lending environment?

It’s night and day. There is a reduced supply of banks. Most of the foreign banks aren’t financing anymore because they’re using the capital in their own countries. And the risk profile has probably been turned back 10 years. Until recently, banks used to lend on anticipated box office performance. Now they will only lend on actual box office performance. People who have money are doing very conservative lending. It’s a good time not to be a banker.

The terms banks are demanding must be onerous, no?

The availability of capital in volume is probably a quarter of what it used to be, and credit terms are very rigid. Pricing is at least three times more expensive than it used to be.

Is there any light at the end of the tunnel?

It will take some time. The majority of banks that left the business weren’t losing money, but their balance sheets shrunk so they had to get out. In the prolonged economic recovery, banks will need to rebuild their balance sheets and be more conservative than before.

How difficult is it for companies such as near-bankrupt MGM or Miramax Films to secure sufficient financing to make new movies?

Anybody trying to raise a significant amount of capital in today’s environment will face obstacles they haven’t had to face in the last five to seven years, when it was a very robust time in the industry. Given the reduced number of banks that are in the industry, it is difficult to get deals done in excess of $300 million. The level of risk that banks will take is lower, and thus you need a lot more equity. And there are fewer equity players.

Is it fair to say studios can no longer count on securing “slate deals,� in which investors co-finance their annual movie programs to mitigate risk?

They are very rare if not dead. They are in this state because for the most part they did not turn out well for equity investors. To date, nothing has taken their place, hence the huge void in the market.

How are the studios adapting to declining DVD sales and movie attendance?

There’s more discipline. They’re reducing talent costs and there is less volume of films being greenlit, so there’s not as much competition to spend [huge amounts for] prints and advertising. DVD is still soft but not plummeting like it was. As new media and new delivery systems get real clarity about how to get content and pay for content and everything stabilizes, investors will return.

In this century?

Two to three years on the short side.

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