Few Banks Try Show Biz : Loans to Small Firms May Carry High Risk

Security Pacific National Bank began lending to the motion picture industry back in 1936, not long after it passed up the chance to finance Walt Disney’s “Snow White and the Seven Dwarfs.” But the bank nearly forsook Hollywood 14 years later, after it helped bankroll “Joan of Arc,” with actress Ingrid Bergman in the title role.

“It came out in the press that she was living with (director Roberto) Rossellini, and she was unrepentant about it,” said Albert W. Kelley, a bank vice president. “The religious press said, ‘Fine, but--’ and that was it. The picture dove in the toilet.”

“Joan of Arc” wound up in the bank’s vault, and several years passed before Security Pacific loaned more money to movie producers.

Few bankers have the stomach for lending to the motion picture industry, with its unpredictable cash flow and flamboyant personalities.

About a dozen banks do lend large sums to Hollywood, however, and the top six have made commitments exceeding $5 billion.

The six largest U.S. lenders are Bank of America, Security Pacific, Bank of Boston, Chemical, Bankers Trust and Bank of New York.

The greatest amount continues to be earmarked for major studios, where the risk is cushioned by extensive film libraries and other assets of the large entertainment conglomerates, such as Warner Communications or MCA, the parent of Universal Pictures.

But increasingly, banks have committed significant sums to a host of small new independent movie companies with far riskier prospects.

At the same time, many of the banks have lost their most experienced lending officers to higher-paying jobs on Wall Street or in Hollywood itself. Last year alone, three of the six largest banks--Bank of America, Boston and Chemical--had to fill the top positions in their entertainment lending units.

To some bankers’ chagrin, companies such as Cannon Group and De Laurentiis Entertainment Group are now deep in financial trouble, with scant hope of rescue from Wall Street, which helped the small companies raise large sums in debt and equity offerings in the last two years.

With last month’s stock market crash and the “junk bond” market in disarray, small companies will likely turn to their banks if they need cash over the next few months. Some bankers ponder privately what lies ahead.

“We’re all talking among ourselves,” said one banker who heads an entertainment lending group, speaking on the condition that his name not be used. “It’s not just Cannon and DEG. It’s Carolco and New World and Vestron. They’ve raised all this money, but they’re not showing earnings right now” from their basic entertainment businesses.

“This discussion is going on,” he said. “Are we doing it right?”

For three decades, the most successful lenders to Hollywood seldom posed that question because of the high profits posted by their entertainment lending units and remarkably few losses.

At Security Pacific, for example, bankers say that “Joan of Arc” and another Ingrid Bergman picture, “Under Capricorn,” were the bank’s last film-related losses--more than 35 years ago.

Risky Business

The largest lenders to Hollywood say their entertainment lending units are consistently among the most profitable within their own institutions, but Bank of New York’s Gerald L. Hassell is explicit.

“We’re the largest and most profitable lending division in the bank,” said Hassell, whose unit handles publishing, broadcasting and cable television as well. “We’ll probably do, net income, 8% to 10% of the bank’s earnings. Not bad for 15 people.” Bank of New York, the nation’s 17th-largest bank, reported net income of $155 million last year.

The profits are pegged, of course, to the riskiness of lending even to major studios--nearly all of which have gone through some financial crisis in the past three decades.

As recently as 1984, Warner Communications had to pledge its prized film, record and publishing subsidiaries as collateral to its banks after Warner lost nearly $900 million in 18 months from its former Atari video game business.

And, after MGM acquired the troubled United Artists studio, the combined companies’ loans climbed to $528 million in 1982. Bankers were consumed with the task of helping the studio work through its problems.

Stage Is Set

At one point, Hassell was spending an estimated “75% to 80%” of his time on MGM/UA, even though his bank was not the lead bank, or “agent.” In such a crisis, “you want to slow down production; try to utilize whatever assets are there; reduce debt . . . (and then) slowly gear up production again,” Hassell explained.

“It’s very, very labor intensive. . . . That’s why a lot of banks aren’t in this business,” he said. “And frankly, that’s why we haven’t gone down below the majors before, because to get to the mini-majors or the independents takes even more time. You’ve got to know it backwards and forwards and know the players and who’s doing what to whom. It’s just too intensive.”

In the past two years, the major studios have enjoyed robust health and haven’t needed much bank borrowing. Most of the major studios are now owned or controlled by conglomerates that enjoy a smorgasbord of financing options. “If you’re lending to somebody like MCA or Disney, it’s not very profitable at all, but nor is it very risky,” Hassell said.

Some bankers, casting about for new lending opportunities, turned to the small production companies that were raising money at a dizzying speed to expand their operations.

The stage was set for lenders to “go to New World and to Carolco and to all these other people who are happy to take the money,” said one former banker, who asked not to be identified. “It looks pretty good as long as everything goes well.”

(So far, Carolco has used less than 1% of its $75-million revolving credit with American banks, while New World has borrowed about $25 million of the $45 million available at its bank.)

But problems began to surface last year, when non-bank creditors forced Producers Sales Organization into a bankruptcy proceeding in Los Angeles.

The Santa Monica-based company had flourished as a distributor of U.S. films overseas but floundered when it attempted to produce its own movies in the United States. The company owed nearly $40 million to Bank of Boston and Chemical Bank.

The PSO bankruptcy triggered a writedown for Bank of Boston, according to Susannah M. Swihart, head of Boston’s entertainment lending unit.

Chemical officials would not comment other than to explain the bank’s general aversion to bankruptcy. “Once a movie company goes into bankruptcy, it’s difficult to go out and collect those receivables,” said John W. Miller, managing director of Chemical’s entertainment group.

Less than a month after PSO entered bankruptcy, the same two banks--along with Bank of America and Wells Fargo--found another customer in trouble.

Calling for Help

Cannon Group disclosed that the Securities and Exchange Commission had begun a formal investigation into its financial disclosures and internal accounting controls. Cannon losses totaled about $82 million for an 18-month period ended July 4, 1987.

Cannon recently failed to make interest payments of $14 million to holders of subordinated debt, but the Los Angeles company said that it intends to pay before a 30-day grace period elapses.

De Laurentiis Entertainment Group has also signaled for help. The company, headquartered in Beverly Hills, raised $85 million just 17 months ago from the sale of stock and junk bonds, but DEG has lost more than $21 million in that same period.

By mid-October, DEG had borrowed $65 million of the $65.5 million available from its four banks and was deep in negotiations to stretch out payments on another $58 million owed on “negative pickups,” or films that DEG has agreed to buy from outside producers. As a result, the outside producers’ banks have been drawn into the fray. On Friday, company founder and majority shareholder Dino De Laurentiis said he might resign; company directors still have not disclosed a rescue plan.

These three experiences have sent tremors throughout the banking industry.

DEG, for example, represented the first time that Bank of New York had loaned money to such a small motion picture company, Hassell said. “That’s not going to totally blind us from looking at other things, but it just makes it harder.”

After PSO’s bankruptcy filing, “I spent some very sleepless nights and did some real soul searching,” said Royall Victor III, the Chemical Bank senior vice president who has been overseeing the entertainment unit for the past five years.

“(I) came to the conclusion that Chemical Bank should be in the entertainment business, but only if . . . we could build real scale in it, so we’re one of the leading banks, (and if) we had an absolute top bunch of people running it.”

Borrowing Limits

Chemical, hard hit by an exodus of lending officers, went outside the bank to recruit Miller from Bank of California, where he had built up a business financing individual film projects. Miller, who runs the Chemical unit from a Los Angeles office, said 50% of his first four or five months was spent on the troubled Cannon account.

The health of independent U.S. movie companies is also monitored overseas, where Credit Lyonnais Bank Nederland has committed more than $550 million to the industry.

Frans J. Afman, a senior vice president in the Dutch bank, said he also spent 50% of his past year on Cannon, which has been allowed to exceed its $45-million borrowing limit at Credit Lyonnais.

Banking competitors are both critical and sympathetic.

One rival lending officer said of Afman and Miller: “These are two talented guys, both of whom ought to be out there making money for their respective organizations. If you suck them into a credit like that, for that amount of time, there’s no way to calculate what that’s doing to the organization.”

The banks typically have no more than 10 to 20 professionals handling not just motion picture lending, but broadcasting, cable television and publishing. Troubled accounts only add to the woes of institutions suffering from massive turnover of their own personnel. In the past year, it was not uncommon to lose one-fifth of the staff.

The exodus is attributed to bank salaries, which pale next to paychecks at investment banks or motion picture companies. As recently as two years ago, some of the top banks paid less than $60,000 to an entertainment unit’s second-in-command.

James A. Parsons, who worked at Chemical Bank and Bank of America, left banking last year to become DEG’s chief financial officer for an annual base salary of $250,000.

The banks insist that they’ve improved compensation recently, and the manager of one entertainment lending group indicates that his salary--plus bonus--is in the range of $300,000 to $400,000. But some former bankers remain skeptical. “Watch the way the feet move,” said one, who did not want to be identified. “My No. 2 person went to Wall Street and quadrupled her salary.”

“The better ones get picked off,” said one bank customer, who also wanted anonymity. He spoke ruefully of re-educating the replacements: “They’re barely out of puberty. And they have the power of life and death.”

Even Parsons has been discomforted by the turnover he helped create. The DEG financial officer complains that DEG’s four banks--led by Bank of America--failed to respond to DEG’s proposed restructuring plan within a month’s time.

“In normal circumstances, a month should be a sufficient time for a bank to address these issues,” he said. “I think the turnover and the new faces have made it more difficult for a client to get a response.”

There were stretches in banking history when top lenders to Hollywood stayed in their jobs for decades and were celebrities in their own right.

Bank of Boston boasted the greatest continuity, with just two executives heading the entertainment unit from 1926 until 1983, when William F. Thompson left to form a venture capital group. Thompson had been recruited in 1954 from Harvard Business School by Serge Semenenko, the Russian-born banker who handled Bank of Boston’s entertainment loans for 41 years.

Semenenko went down in banking history for his luxurious life style (a Pierre hotel suite in New York, Mediterranean yachting vacations) and his controversial practice of investing in some of his client companies.

An early retirement was prompted in 1967 by Warner Bros.’ disclosure that the studio was paying Semenenko a $1-million personal fee. The fee was subsequently turned over to the bank.

On the West Coast, entertainment lending was dominated by Bank of America, after Dr. A. H. Giannini, a brother of the bank’s founder, made the first loan to a nickelodeon operator in 1909. Giannini was apparently the first banker to accept film negatives as collateral.

In 1936, Joseph H. Rosenberg took over the unit--and made the loans needed by Walt Disney for “Snow White,” the animator’s first full-length film.

“Joe really is the guy who should be given the credit for financing Disney,” said Peter W. Geiger, a Bank of America vice president who knew Rosenberg until his death in 1971. For half a century, B of A has continued as Disney’s lead bank--an irony not lost on Security Pacific, which passed up the “Snow White” loan, according to Security Pacific Managing Director Zelbie Trogden.

Rosenberg’s retirement in 1946 came toward the end of an era, when the banks “would make loans based on a script and an actor,” according to Trogden. “If it didn’t do well, we didn’t get paid.”

Movies traditionally had sold enough theater tickets to repay the banks, but in the 1950s, television began keeping moviegoers home. The motion picture industry experienced a painful contraction, made more severe by antitrust court rulings that forced the studios to spin off their movie theaters.

Independent Producers

By 1952, Bank of America had foreclosed on 30 films and hired Geiger, then a film marketing executive, to try to recover the bank’s losses by distributing the films. “We had a potential $15-million loss--which was considerable in those years--that we recouped entirely,” Geiger said. Bank of America was “tempted” to quit lending to Hollywood, but “that recouping sort of gave them renewed life,” he said.

From movie commitments of $33 million in 1936, Bank of America’s commitments have now climbed to $2.3 billion, or 5.7% of the bank’s total commitments of $40.3 billion. In the motion picture industry, Bank of America towers over the next largest lender, Security Pacific, with an estimated $800 million in commitments.

When Security Pacific returned to film lending in the mid-1950s, it changed “the basis under which we made loans,” Trogden said. If the bank loaned money to an independent movie producer, guarantees of repayment had to be obtained from a distributor such as United Artists.

That system persists today, enabling independent film makers to obtain bank loans not only on the guarantee of theatrical distribution but on distribution contracts for home video, pay television, network television and foreign theatrical markets.

The film maker can borrow production funds by saying, “ ‘Here’s a Home Box Office contract and here’s a Showtime contract and here’s an ABC contract. . . .All of these add up to $10 million; will you lend me $9 million?’ ” explained Alexander T. Mason, a managing director at Bankers Trust in New York.

Only in the past two years, however, have so many independent producers decided to form companies, typically by raising money from public investors and committing themselves to a sharply increased number of films.

“I don’t think you’ve (ever) had this many,” said Geiger, reflecting on the past four decades. “Obviously it was made easier by the liquidity of money from the Street, so everybody was going in there.”

Some companies, such as New Line Cinema, were content to sell new shares and establish a line of bank credit. But many of the new companies also raised money by selling debt. In the case of just four companies--Cannon, Carolco, DEG and New World Entertainment--more than $650 million was raised through subordinated debt.

Easy to Say No

“I think the investment banking (community) was throwing too much money at this industry,” said Chemical’s Miller, contending that companies “have gone out and raised massive amounts of money and not had any game plan.”

Miller and other bankers think the money burned a hole in Cannon’s pockets, judging from its acquisition spree in 1986. Cannon spent $270 million on a British film company and another $24 million on the Commonwealth Theatre chain. Meanwhile, the film maker released 32 movies with no major success. This year, Cannon is selling assets to stay afloat.

Few independents can match Cannon’s flamboyance, and not all have even sought formal lines of credit at the big banks. Vestron Inc., a home video company that branched into film making last year, raised $115 million through the sale of convertible debentures. “We haven’t had the need to put in a credit facility,” said Vestron Treasurer Sheldon Rabinowitz.

But bankers insist that they’ve turned away companies intoxicated by Wall Street’s ability last year to raise large sums.

Stephen A. Kwitoski, the vice president who took over Bank of America’s entertainment, media and health-services group just one year ago, said that he found it easy to say no to companies with ambitions of setting up a distribution network to theaters, home video operations and a myriad of new ventures virtually overnight.

“I’m a newcomer to this business, but it doesn’t take you very long to recognize that $50 million to $75 million doesn’t go very far if your plans are to be all things to all people,” said Kwitoski, whose previous bank assignments included aerospace, electronics and energy lending.

With less success, some banks have tried to apply the brakes on larger, more established movie companies. Bank of Boston, as the agent bank to Orion Pictures, recently objected to increasing that movie company’s borrowing capacity to $300 million from $250 million unless Orion maintained a certain net worth, banking sources said.

Orion responded by switching the agency to Manufacturers Hanover Trust, which apparently is having no trouble enlisting banks as participants in the new proposed revolving credit.

The agent bank typically collects higher fees than other participants and has the best crack at handling new business for the customer. With banking deregulation, commercial banks are offering services than once belonged exclusively to investment bankers.

Banks must often work together in a credit agreement, but they spend more time competing for business, according to Mason, the 36-year-old managing director at Bankers Trust. “The group of bankers to the industry has often been referred to as a club,” he said. “It isn’t in the classic sense, because there are no rites of membership.”

Bankers Trust has won two agencies away from Boston and Chemical in the past 18 months and clearly seeks a leadership role. “I don’t want to characterize us as an institution that only likes to be agent,” Mason said, “but as a practical matter, we like to be the agent bank.”

In Mason’s seven years with the unit, Bankers Trust has increased its total media commitments to $2.5 billion from $100 million. But the managing director said that he urges his bank officers to be selective.

“There are going to be winners and losers in this business, and if you have 100% market share, you’re going to own the losers,” he said. “In our business, you don’t make much money off the winners; you’re making an interest rate. If you own the losers, you lose a lot of money.”

LARGEST LENDERS TO THE MOTION PICTURE INDUSTRY

Total Commitments Bank to Movie Industry* Bank of America $2.3 billion Security Pacific 800 million Bank of Boston 750 million Chemical Bank 700 million Bankers Trust 625 million Bank of New York 400 million

Commitments to public mini-majors Bank and small independents ** Bank of America Cannon, DeLaurentiis $ 59.0 million Entertainment Group, Lorimar-Telepictures Security Pacific Carolco, DeLaurentiis 141.5 million Entertainment Group, Lorimar-Telepictures, Nelson Holdings, Orion Bank of Boston Cannon, 117.7 million Lorimar-Telepictures, Orion Chemical Bank Cannon, Lorimar- 209.7 million Telepictures, Nelson, New Line, New World, Orion Bankers Trust Carolco, Lorimar- 105.0 million Telepictures Bank of New York DeLaurentiis 50.0 million Entertainment Group, Lorimar-Telepictures

* Company-supplied estimates ** Revolving lines of credit