Film Funding Blog

The terms Gap Financing and SuperGap financing have been getting a lot of play lately. As these concepts are sometimes hard to succinctly define, I was impressed by this pithy description from the Wikipedia:

Gap/SuperGap Financing

 

In motion pictures, Gap/Supergap financing is a form of mezzanine debt financing where the producer wishes to complete their film finance package by procuring a loan that is secured against the film’s unsold territories and rights. Most gap financiers will only lend against the value of unsold foreign (non North American) rights, as domestic (North American: USA & Canadian) rights are seen as a “performance” risk, as opposed to more quantifiable risk that is the foreign market. In short, this means that the foreign value of a film can be ascertained by a Foreign Sales Company/Agent by evaluating the blended value of the quality of the script, its genre, cast, director, producer, as well as whether it has theatrical distribution in the US from a major film studio; all of this is taken into consideration and applied against the historical and current market tastes, trends, and needs of each foreign territory of country. Surprisingly, this is fairly predictable to a certain degree of certainty. Domestic distribution, on the other hand, is very unpredictable and far from ever a sure thing (e.g. just because a film has a big budget and a commercial genre and cast, it could still be unwatchable and thus never receive a theatrical or television release in the US, thus being relegated to being a big budget, direct-to-video film.) So, in as much as there can ever be any certainty in the entertainment business, lending against foreign value estimates is almost always going to be a much better bet than banking on domestic success (comedies and urban films being two notable exceptions: they’re referred to a “domestic pieces” or “domestic plays”.)

 

True to its mezzanine nature, in the pecking order of recoupment of investment, generally, gap (or supergap) loans are subordinate to (recoup after) the senior/bank production loan, but in turn, the gap/supergap loan will be senior to (recoup before) equity financiers.

A gap loan becomes a supergap loan when it extends beyond 10-15% of 100% of the production loan required to shoot the film (or in other words, when the percentage of the gap required to complete the film’s financing package becomes greater than a bank is willing to bear, which is traditionally 10-15%, but can sometime be a flat dollar threshold like USD$1,000,000.)

Gap/Supergap lending is a very risky form of capital investment and accordingly the fees and interest charged reflect that level of risk. But at the same time it’s not unlike buying a house: nobody pays 100% of the purchase price with cash; they pay about 20% in cash and borrow the rest. Supergap financing works by the same principal: put down 20-30% cash/equity and borrow the rest.

Over the years, because of the high risk nature, many supergap companies have come and gone, but a few established players have survived the ups and downs of the markets: Screen Capital International is arguably the gold standard in the industry, with Grosvenor Park, Blue Rider, Newmarket Capital, and 120db also being significant “players” in the debt financing space.

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