Credit Crunch Hits Hollywood
In a major setback, Paramount Pictures was forced to step back from a film financing package worth $450 million, as the credit crunch has landed square in the American entertainment industry.
The fund, which would have had the backing of Deutsche Bank, would have financed close to 30 films if it had went through..
Evidently the major impediment to the closing of the deal was the senior debt component, which wasn't embraced by the market. Unless a deal involves triple-A rated credit, the industry is backing away from deals. Paramount doesn't reach that level, and so the deal was squelched.
With the failure to make a deal, Deutsche has closed down its film financing division to pursue more sure categories.
While the bank put together all the equity and junior debt needed, the failure to secure senior debt told them there aren't going to be deals put in place in the film industry in the current credit market; thus exiting the business.
In other words, if it didn't work with Paramount Pictures, it's not going to work with another film company at this time either.
This is a major problem for Paramount and possibly Viacom (VIA-B), as well as the overall industry. If they have to go to other sources, it could put companies at more financial risk; both the studios and those providing the financing. That's the reason Paramount walked away from this one, as the terms were deemed too high to accept.
If Paramount has to go to Viacom for financing, it will be a much greater risk than financing that spreads the risk.
A number of other banks, including Dresdner have left the film business at this time.
Supposedly the films affected by the lack of a deal should still be made, and Paramount alleges it has more attractive financing available; but that remains to be seen.
It's not going to be business as usual in the industry, which has enjoyed a lot of liquidity in the recent years.
No matter how they spin this, it had to hurt.
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