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Pulse Blogger The need for syndicated financing and completion bonds in Nigeria's film industry

It therefore beholds on any smart investor or financier of such films to spread the burden of such finance requirements by syndicating same.

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Top of the list of challenges is the risk associated with funding high budget movies in Nigeria. play

Top of the list of challenges is the risk associated with funding high budget movies in Nigeria.

(Africa Shared Value Summit)

The tremendous growth of Nollywood has been well-advertised in Nigeria’s entertainment scene and economy at large.

This sub-sector has contributed significantly to the surge in gross domestic product (GDP) of the country and the entertainment industry. This sub-sector, which includes both the theatrical(cinematic) release and non-theatrical (DvD and Ancillary sales (Tv and Internet) distribution, has been valued at over $4 Billion as at 2017 by Pricewatercoopers

The majority of this sub-sector’s value has been built on the DVD Market which is premised on mass and low budget production scheme.  However, With the advent of new players in the ecosystem, particularly the increase in the number of cinemas, VOD platforms, and the creation of more Pay TV stations, there has been forced pressure on the DVD market in Nigeria. This has led to a negative effect on the creation and sales of DVD films and thus, the untimely death commercial-wise.

DVD films have relatively low production budgets and thus go for the meagre retail amounts. While ‘Cinema films’ have higher quality productions with larger budgets, and offer far better value, more importantly, the opportunity for Nigerian movies to cross-over internationally ‘to the other side’.

In light of this, it is important that stakeholders and industry practitioners prepare themselves and begin to find viable avenues of commercially exploiting high budget (cinema) films in order for financiers/producers of such films to secure acceptable returns on their investments.

The Nigerian box office generated N4b (Four Billion Naira) in 2017 with around 35% of that  figure attributable to Nollywood while the other Seven(7) major studios comprising of 20th century Fox, Warner Bros, Disney, Sony, Columbia, Universal and Paramount making do with 65%. The Nollywood slate did three times better than the second best in 2017, 20th century Fox which contributed 12.5% to the overall GBO.

Read Also: 5 New Nollywood movies you should see in cinemas this August

Nigeria's entertainment sector play

Nigeria's entertainment sector

(SlideShare)

 

The aforementioned 2017 reports reiterates the notion that the sector of Nollywood’s cinema films should not be underestimated given the the growth of cinema-culture amongst the middle classes and the creation of more cinemas.

Furthermore, the revenue streams from theatrical releases of movies are much more transparent and measurable, therefore providing the type of data and information that can and will attract more investment into the industry unlike traditional DVD market whose battle with Piracy is all but lost.

But Why Syndicated Financing?

Syndicated financing is where two or more parties agree to work together to jointly finance a project (a film) where the amount of finance required is significant and therefore extremely risky for one party to undertake alone.

Traditional Nollywood movies(DVD films) (ie with low budgets, short production schedules, and even shorter shelf lives) have been and continue to relatively cheap to produce and market thereby minimising the risk to the producers. These films rarely require any additional funding outside that provided by the producer and given the relatively low amount of funding required to get such movies to market, producers’ of this cadre usually have little risk attached to their capital. 

Cinematic Nollywood productions on the hand, due to their use of a well known cast, luxurious locations, full complement of under the line professionals (e.g. camera men, runners, line producers, sound professionals etc), and state of the art equipment, generally require much larger budgets that can range anywhere from N80m (Eighty Million Naira) to over N300m (Three hundred Million Naira). It therefore beholds on any smart investor or financier of such films to spread the burden of such finance requirements by syndicating same.

As an example,The wedding party franchise has generated Gross box office revenues of over N950m (Nine Hundred and fifty Million Naira) for the two feature films in cinemas in 2016 and 2017. Both feature films have been reported as the most expensive domestically produced movies in the history of the industry (having an estimated production budget of N300m (Three Hundred Million Naira).

However, given the size of its production budget, this feature film was financed by four different production companies namely; EbonyLife, FilmOne, InkBlot, and Koga Studios also known as the ELFIKE Collective.  

This form of syndicated financing should become the blueprint going forward especially given how well it worked for the Wedding Party projects. Moreover, now that there is reliable evidence of what can be commercially achieved by Nollywood films which leads to increase in bigger budget movies, and with bigger production budgets comes additional risk. It will therefore increasingly be the case that such syndicated/multi-lateral means of film financing will be employed to spread the financial burden and the attendant additional risks.

However, despite the precedent set by the Wedding Party franchise  in terms of its financing structure, several challenges still remain with the funding of such high budget movies. Top of the list of challenges is the risk associated with funding high budget movies in Nigeria, specifically in relation to ensuring said films are completed on time, on budget, and to the appropriate technical standards.

How can such risks be mitigated thereby making high budget film financing more attractive to investors? The traditional method of mitigating said risks in developed film markets is through the use of completion bonds.

Completion Bonds?

A completion bond is a form of insurance/guarantee offered by a completion guarantor company - usually a bank or an insurance company - to cover the costs of ensuring a movie is completed after production commences. Completion bonds are often used in independently financed films to guarantee that the producer will complete and deliver the film (usually based on an agreed script, cast and budget) to the distributor(s).

Read Also: 'Checkmate' star wonders why Nigerian banks sponsor Hollywood movies premiere

Film financing in Nigeria. play

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(Nigerian Tribune)

 

The producer will normally agree to deliver the film to the distributor in respect of certain territories in consideration for, amongst other things, payment of a "Minimum Guarantee“(MG) payable at the point in time when the producer delivers the completed film. 

The producer obviously requires such funds upfront to finance the film thus the producer takes the signed distribution contract to a bank or other financial institution and will effectively use it as collateral against a production loan/finance.

The MG can then be received by said bank, who has provided an advance against the MG to the producer to initiate production.It is at this stage that the bank or provider of the advance against the MG will require a completion bond to be executed to provide them with the required level of security against the risk of non-delivery by the producer.

The parties to a completion bond agreement are typically the producer, the financier(s), the completion guarantor company and the distributor(s).

There are significant commercial opportunities for the film industry to begin to partner and work closely with banks, insurance companies and other financial institutions to underwrite and guarantee high budget film productions. By providing completion bonds and other similar products/services for mid to high budget independent films, the producers of same will find it easier to secure production investment from financiers.

When investors are able to mitigate their risks (by finding ways of guaranteeing that producers complete their movies) they will be much more likely to part with their cash, and this is crucial in an environment where trust is a scarce  commodity. Such guarantees can also prove to be a lucrative source of income for financial institutions seeking ways of tapping into the entertainment sector (without having to directly invest), especially given that on average of 80+ movies for theatrical release are produced each year; and this number is going up annually.

The foregoing is a merely an overview of the concept of completion bonds and traditionally how they are employed in the film industry. For the stated partnerships to truly work Film producers and financial institutions will have to negotiate mutually agreeable terms in any such bond agreements wherein producers do not feel the fees for such facilities are beyond their budgets and guarantors do not feel unnecessarily exposed to any attendant risks.

Reference and blueprint : Olumide Mustapha/Legalbyte

Written by Ife Idowu.

Ife Idowu is a business oriented lawyer focused on entertainment, intellectual property and international business. Connect with Ife on: ifeidowu.com | ife@ifeidowu.com | Twitter  | Instagram

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