Company Town : Its Game Is Bond, Completion Bond

While Michael Segal is hardly a household name outside Hollywood or even a recognized face on La Croisette, his 5-year-old completion bond company is playing an increasingly integral role in how the major studios are structuring many of their big-budget movie deals.

Judging by the well-attended lunch that Segal and his associates at International Film Guarantors hosted this week at the lavish Hotel du Cap for some of the industry’s heaviest-hitting attorneys, bankers and entertainment executives, one would have to consider his outfit one of the most significant players at this year’s Cannes Film Festival.

When Segal launched Los Angeles-based IFG, a joint venture between his Chicago-based Near North Insurance Group and Fireman’s Fund, a little more than five years ago, Hollywood’s major studios rarely used completion bonds on their movies.

Unlike independent producers and distributors--which secure such a bond as a guarantee to a bank that if the film goes over budget or over schedule, the bond company will step in and complete the picture--the studios typically take the risk on productions they self-finance. Only on “negative pickups,” in which a studio agrees to pay a certain fee for a movie only after it is completed, will the studio typically buy a bond as protection against averages.

But today’s movie deals have become more complicated.

“As the studios modify their business plans to include more split rights, more co-finance and more co-ownership deals, bonds are playing more of a role,” Segal says.

With the cost of making and marketing movies going up--the industry average for a studio movie was $50 million last year--and the profit margins squeezed, studios are increasingly finding ways to minimize their risks.

On higher-budget movies, the majors frequently work with each other by splitting the domestic and foreign rights, or structuring co-financing and co-ownership arrangements with third parties.

“Because there are a lot of split-rights deals and the studios are willing to give up ownership to get these event-type pictures,” Segal says, “the studios need bonds to protect themselves since they’re not in total control.”

In these cases, a bond company serves as an impartial third party, or the “bad cop,” as the case might be.

“I’m the last person anyone wants to see getting off the plane,” says IFG President Lindsley Parsons, who runs the Los Angeles-based operation.

Parsons, a veteran physical-production executive at MGM and Paramount who was most recently president and CEO of Lucas Digital Ltd. (the umbrella company for George Lucas’ Industrial Light & Magic and Skywalker Sound), says that in the past five years, IFG has underwritten $1.6 billion worth of productions.

When asked how often their bonds have been utilized, leaving the company holding the bag, Segal says: “We’ve used some of our resources on a minor basis. . . . The aggregate is less than seven figures.”

Segal estimates that in the past five years, $120 million of claims from various bond companies have been paid through the London reinsurance market.

During the past nine months, Parsons says, IFG has bonded four major movies costing more than $70 million each.

They are Mel Gibson’s “Braveheart,” released domestically by Paramount this week, and which Twentieth Century Fox is handling overseas; John McTiernan’s current “Die Hard” hit, which Fox has in the United States and Disney will release internationally; Disney and Cinergi Productions’ upcoming “Judge Dredd” starring Sylvester Stallone, and Renny Harlin’s “Cutthroat Island,” a Carolco production for domestic release by MGM/UA, which pushed back the release date until later this year.

Parsons says that because “we didn’t invade the bonds [the bond company did not have to step in and take over the production], it’s helped establish our credibility on the big pictures.”

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Another current production bonded by IFG is Ridley Scott’s “White Squall,” for which Disney has the domestic rights and Largo Entertainment the foreign rights.

Segal says he and his IFG colleagues “feel comfortable we can bond pictures up to $100 million.” This gives the company an edge over its biggest competitor, Film Finance, which has incurred some major losses in its long history and does not bond movies over a certain budget level.

IFG charges movie companies 2% to 3% of the total production budget upfront and another 2% if the bond is invaded. At one time, companies paid up to 6% and received a 3% rebate if they didn’t utilize the bond.

During the late 1980s and early ‘90s, the bond business became extremely competitive and companies began charging lesser fees (some as low as 1% upfront and 1% if the bond was invaded), relaxing the standards of how they underwrote movies and expanding the guarantees to distributors in addition to the banks, Segal says.

Some bond companies, such as Film Finance and the now-defunct Completion Bond Co., which was left holding the bag on Spike Lee’s “Malcolm X” and ultimately went out of business, have taken big hits over the years.

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La joke of the week: As told to The Times by New Line Cinema marketing and distribution President Mitch Goldman: What’s the difference between La Croisette (the main drag in Cannes) and a croissant? There are more crumbs on La Croisette.