Almost two months ago, I tweeted about Robert Halmi International (RHI) Entertainment’s massive bankruptcy that took out US Bank’s entertainment division. Having had some time to think about it, I realize this path of destruction did not end with US Bank, but will continue through a slew of other banks that bought into the syndication of RHI’s loans. Ultimately, this wave could come crashing right through the front door of JP Morgan’s entertainment division.
My understanding is that RHI, which earns about $45m a year in revenue, has ended up over $400m in debt! This comes less than two years after their $189m IPO (the proceeds from which were supposed to pay-off their previous debt.) Now, as a result of the bankruptcy, they face delisting from the NASDAQ.
I’m not going to speculate about how RHI ended up $400m in debt, but I am going to speculate that there is a large deep-pocketed syndicate of banks who own significant pieces of RHI’s credit facility, which was originated by JP Morgan and syndicated out to numerous other banks, including US Bank.
Syndication typically occurs when a company wants a large credit facility from a bank. The bank, not wanting to carry that much debt (and risk) on their books, will get a bunch of other banks to buy pieces of that loan. Banks that aren’t sophisticated in entertainment lending will often buy into syndication deals because it helps to round-out their loan portfolios with some higher-risk media investments. Other entertainment banks will also buy in to subsidize deal flow (or offset their single-picture loan books.)
The bank that originates the loan gets a healthy fee for their work. This is big money, so all banks like to originate syndication deals. In the world of entertainment syndication deals, JP Morgan’s entertainment division is the undisputed master of the universe. They are the originators and epicenter of the vast majority of entertainment syndication deals, generating huge credit lines for Dreamworks, Lions Gate, Overture, and Sony’s purchase of MGM, in addition to RHI.
But with great power, comes great responsibility. Besides blessing these deals in the first place, JP Morgan was supposed to serve as steward of these loans — keeping a vigilant eye on the borrows, on behalf of their respective syndication networks. With RHI, however, somebody at JPM fell asleep at the wheel, causing the car to veer off the road, over a cliff, and into a fiery pit.
The logical extrapolation of all this is that these banks are not going to go down quietly and are probably gearing up for a massive law suit, which, if successful, could be significant enough to take-down JP Morgan’s entertainment division, too. That’s going to create quite a vacuum in the entertainment lending space, which has gone from 12 banks to six in just under two years.
I don’t see another institution filling that space because all the potential syndication buyers have been burned (or aren’t going to risk it a second time.)
What does this mean for the independent producer out on the street trying to get a movie financed? Without a syndication network, banks are going to have to carry more loans on their books, which means they won’t be able to do as many deals, and are going to be even more conservative in their lending practices.
Comerica, Union Bank, Pacific Mercantile, City National Bank, Bank Leumi, and National Bank of California are going to be spending a lot of time on the phone trying to convince each other that they should buy into each other’s loans, and vice-versa. What a mess.