Whenever there’s a currency mismatch between the budgeted costs and the funding of a film, or between any loan funding and its associated collateral, there’s an exposure to currency volatility and the risk that the secured funding will no longer match the required budget.
Previously, we’ve looked at the different types of risk and who bears those risks.
As a TV or film producer, the responsibility often sits with you. The completion guarantor and investors may require you to hedge the currency exposure to ensure the recoupable terms on the loan are not made more expensive by exchange rate fluctuations.
In this post, we’ll look at three common scenarios where working with a foreign exchange specialist like Centtrip could help you manage your project’s exchange risk exposure.
Scenario 1 - The risk of film project funding in different currencies
A £2M film or television project is funded by £1.5M and US$675K. The exchange rate for GBP/USD is 1.35, meaning there’s sufficient funding to make the film at the current time.
Exchange rate movements between the time of agreeing the funding and when it is drawn down may mean that the dollar amount converts into less than the required £500K by the time the production requires the funds.
The Centtrip solution
Sell the $675K immediately at the current exchange rate of 1.35 to generate the £500K needed.
Your funding is locked and the budget is 100% funded.
Scenario 2 - The risk of foreign currency funding secured against UK collateral
In this scenario, a £3M production is funded by £2.5M and US$650K. The $650K is secured against a UK tax credit payable in 12 months, with recourse to other revenues in the event of a shortfall. At the current 12-month forward exchange rate of 1.30, the anticipated GBP tax credit amount (£500K) will be sufficient to repay the USD investor.
Exchange rate movements over the 12 months may mean that the tax credit converts into less than the required $650K meaning that the investor has a claim on other revenues to make good the shortfall.
The Centtrip solution
Convert £500K into $650K at the 1.30 rate as a flexible forward contract, for settlement in 12 to 15 months’ time. No deposit is payable and the contract can then be executed on any date between 12 and 15 months. The USD amount is secured so that the investor can be repaid without recourse to other revenues.
Scenario 3 - The risk of funding secured against international presale revenues
Here, a £2M production is funded by £200K from the BFI (British Film Institute) and a £1.8M investment. The investment is secured against a UK tax credit of £400K and presale revenues of US$1.82M, due to be received in 12 months. Any shortfall will be made good from producer deferrals. The GBP/USD rate is 1.30, so at present the $1.82M presale revenue covers the £1.4M that would need to be recouped.
Negative exchange rate movements over the 12 months may mean that the $1.82M converts into less than £1.4M when it is required. In that case, the shortfall would come out of producer deferrals.
The Centtrip solution
Convert $1.82M into £1.4M at the 1.30 exchange rate using a flexible forward contract, with settlement due between 12 and 15 months’ time.
The GBP amount is secured so that the investor can be repaid without recourse to producer deferrals.
Exchange rate risk, the voice of experience
As UK film producer Steve Jarvis, of Parkhouse Pictures, says, “The bigger you get, the bigger films you make, the greater the likelihood you’ll get foreign finance.”
For a recent project, the production house was receiving its finance in euros, but had a production budget wholly in pounds sterling. Recognising the risk of an adverse shift in rates, Steve locked the exchange rate using a forward contract.
“A shortfall would have caused us a serious issue,” he explains. “It would mean that we were no longer fully funded and potentially in breach of our completion bond. A sudden fluctuation in currency could have meant looking for big budget cuts or a dash for additional funding.”
In the event, he says, “We locked our rate at 1.125 and the actual rate ended up being 1.17, a movement of 4 or 5%. Without hedging, we would have had a shortfall of £130,000 to £140,000.”
As the industry becomes increasingly international, currency management is an ever more critical aspect of film finance.
Implementing a currency strategy is not as expensive as some imagine. A small percentage cost can bring a large increase in certainty on currency movements, keeping bond holders and producers happy.
How Centtrip can help
Centtrip has nearly ten years’ experience connecting the world’s most glamorous money for the most dynamic customers and their users. We support internationally mobile teams and funds operating in demanding sectors like music touring, superyacht operations and film production.
We can provide simple, low-cost, flexible, foreign exchange solutions for all situations where there is a mismatch in currency, leaving you free to focus on making a great movie.
You can read more about how Centtrip supports the film and TV sector here.