The Central Bank of Nigeria (CBN) on July 1, 2019, issued the Modalities for the Implementation of the Creative Financing Industry Initiative (the “Modalities”). The publication of the Modalities follows an earlier announcement of a Creative Financing Industry Initiative, to provide debt financing support for the creative industry in Nigeria, specifically, the Fashion, Movie Production/Distribution, Information Technology and Software Development verticals of the “creative economy”. The idea really is to provide cheaper and long term financing for Nigerian companies in the creative industry. The Modalities make certain that, at the very least, 6 film distribution companies will have access to a principal amount of N500,000,000 (Five Hundred Million) each, whilst up to 60 film producers, will be able to access up to N50,00,000 (Fifty Million Naira), each for a 10-year tenor.
This update relates specifically to the Nigerian film industry, specifically movie/film distributors and movie producers.
What Strategic Opportunities Will the CBN Facility Create for Film Entrepreneurs in Nigeria?
- The CBN Facility presents long term financing opportunities for not only independent producers/film companies, (the “Independents”) but also, the more integrated film companies in Nigeria (the “Majors”). It’s easy to see that the commercial terms of the CBN Facility are considerably better than that of the NollyFund bankrolled by the Bank of Industry, another development finance intervention. Except other development finance banks – DBN, AFDB etc, provide similar development finance interventions, the commercial terms of the CBN Facility are not typically available from commercial lenders;
- Film producers/distributors who have hitherto self-financed movie production/ distribution projects, will find some strategic advantage in leveraging the CBN Facility to de-risk & reduce their current/future financial risk exposure;
- Film producers/distributors who have taken loans at exorbitant interest rates, will find some strategic advantage in leveraging the CBN Facility to refinance existing debt/credit lines;
- The CBN Facility presents an opportunity for properly aligned industry veterans and independent film companies to merge into/establish fully “integrated” film companies;
- There may also be an opportunity for film producers/distributors to leverage the CBN Facility to create and capture value in other film verticals, say for instance, where, a production company makes a strategic decision to create film distribution/exhibition capabilities or vice versa
- The CBN Facility presents an opportunity for the ‘Majors’ to generally, re-organize their risk exposure and to explore to explore innovative financing arrangements, like Negative Pick-Up arrangements;
- The successful disbursement/implementation of the CBN Facility will drive increased participation of other asset classes/investors in the film finance value chain – The universe of investors can potentially accommodate more private equity investments, structured finance products, film co-investments and private equity/debt film funds
Lending to the Film Industry – The Lender’s Dilemma
Film producers who have tried to access loans from banks or alternative lenders have had some concern around the financing and collaterization approach and requirements that lenders ask for. Indeed, the evidence suggests that lenders tend to favour a corporate finance approach and may prefer to look to external sources for loan repayment & security. On the industry end of the spectrum, what the evidence suggests is that film companies do not have the balance sheet and assets that can support the traditional corporate finance approach.
Similarly, film producers may not have the kind of collateral, in real estate terms that lenders are asking for. The result of this approach has been broken deals and, with the more successful deals, a turn of loan default events, especially for Independents.
Even the Majors who presumably have stronger balance sheet may struggle with traditional corporate finance approach – In 2016, An AMCON appointed receiver, took over the control of one of the more integrated film companies in Nigeria for failure to repay its debt .
Whilst one understands the legitimate need for lenders to mitigate credit risk, it appears that a financing approach that demonstrates a more intimate understanding the intricacies of the movie industry and implements contractual models around managing and transferring risk efficiently, is a more sustainable approach for Nollywood. Without a doubt, debt finance for the film industry will have to be more than the clinical financing approach that currently exists.
It helps, in part, to view film financing from Project finance perspective. Viewed from this angle, a number of structuring considerations become necessary. A few of those are discussed below
- The first is that, project risks should be allocated to the contractual party that is best positioned and able to to assume, control or insure against such risk. For instance, it does appear that, relative to a lender and sometimes a producer, a film distributor will most likely have the better judgement and resources to assume quality and performance risk, – two of the most important risks within a film financing risk matrix – The evidence suggests that film financing projects that follow this pattern may record less default event. This basic principle underlies the traditional debt financing approach for film projects which would usually make provision for lenders to exit upon completion of film production and for exhibition revenues to go to pay for expenses incurred by exhibitors and distributors whilst residuals are distributed back to production companies and other equity/sweat investors. It is useful to note that the principle can be applied within a variety of debt financing structures.
- Another would be to recognise the repayment of loan amounts and interests solely ( and in practical terms) from film revenues and to recognise further that security/collateral structures should primarily revolve around film assets. This approach will drive some other structural considerations. For instance, lenders and film entrepreneurs may find strategic benefit in structuring the production company as a special purpose vehicle. This way, the only asset of the special purpose vehicle will be the film and the sums derived from the film’s exploitation. On top of that is the need to recognise that a film is essentially a bundle of rights and further that the way financial value is created and captured, within a film project, is by the supply and demand of those rights. It also helps to recognise that a film’s primary assets are in the nature of intangibles and movable assets. From a securitization perspective therefore, the film’s physical properties will, include the master negative, daily rushes and props, which should be the primary subject of fixed charges; whilst floating charges should ideally track the cash deposits standing to the credit of any production bank accounts; including all present and future copyright in a film, the benefit of key commercialisation agreements (including distribution agreements) contractual rights, insurances and related receivables.
Film/Movie Entrepreneurs – Cash Follows Structure
We think that that Nollywood has room for more Majors. However, what the evidence suggests is that, film producers/distributors looking to access debt financing opportunities like the CBN Facility, private equity investment or other types film finance opportunities now available in the market), will need to consider some level of entity re-organisation.
Entity structuring lies at the heart of access to finance. If one agrees that access to finance is key to the transformation of Nigeria’s movie industry (and by “transformation”, I mean, a state of affairs where participants across the movie value chain capture maximum possible value from the exertion of their skills and intellectual property ), film entrepreneurs will need to be more deliberate about entity structuring and the allocation of their resources. A strong script, a great team and cameo appearances would not amount to much without putting in place the right structures for raising finance and film exploitation.
Another dimension to entity structuring relates to film contracting. In a third-party financing scenario, the strategic management and protection of the intellectual property rights that come with film production will be more important than ever. One way to think about this is to recognise that film exploitation is essentially a rights-selling game and the way financial value is created and captured is by the interplay of those rights.
Within this context, contracts are very important to lenders and investors, especially within the context of a film project which brings together a very interesting mix of different individuals who are not necessarily aligned. Contracts aren’t merely nice-to-haves and are important because they assure and protect revenue.
A film producer who is looking to access third party financing should be keen on plugging all revenue gaps within the film production and exploitation value chain and looking to tie-in all film stakeholders – actors, directors, crew members, producers, etc. contractually, with a central focus of ensuring that the intellectual property rights in a film project does suffer depreciation or leakage.
The choice of film finance is also key consideration as well. The choice of film financing will drive the level and type of financial risk that a film producer/distributor will be exposed to. Each type of film finance option will come with different structuring considerations and documentation. From a debt financing perspective, film producing companies will have to negotiate financing & security documents – i.e. legal mortgages, all asset debentures, personal guarantee, completion guarantees etc.).
There may also be also other critical baseline issues – for instance -, Seeing that the CBN Facility requires a 30% equity contribution from promoters; the question a film entrepreneur/promoter might want to ask is – what are the structuring options available to me to finance a 30% equity contribution? Or then, how do we deal with a previous line of debt/credit? What is the optimal financing mix that will work for a certain types of film projects? Should a film project company be registered in/domiciled offshore/out of Nigeria instead? In what scenarios will private equity and/or debt be a financing option? These are all core financing issues and documentation that will require some level of good professional support early-on.
Overall, the CBN Facility is very welcome intervention and we hope that industry practitioners will take advantage of it. I expect that the government at all levels will consider tax incentives as one of the strategic interventions to drive growth and expansion in Nollywood.
