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?
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 we understand the legitimate need for lenders to mitigate credit risk, we think 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. 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. We discuss a few below
Film/Movie Entrepreneurs – Cash Follows Structure
It is clear to us 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 we agree that access to finance is key to the transformation of Nigeria’s movie industry ( and by “transformation”, we 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. We also expect that the government at all levels will consider tax incentives as one of the strategic interventions to drive growth and expansion in Nollywood.
For additional clarifications and questions regarding accessing the CBN Facility or other financing/investment opportunities, please reach out to your Balogun Harold or to our film finance team via the following email addresses: firstname.lastname@example.org; email@example.com; firstname.lastname@example.org