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A credit crunch affects any type of leveraged buyout--debt becomes more expensive and harder to obtain, requiring more equity, making returns lower. Considering how many leveraged deals Hollywood has made, that industry should be no exception. Wall Street players--private equity, hedge funds, investment banks--have put together more than $12 billion dollars of financing for the Hollywood studios' 'slates' of films. The studios love it--they get to reduce their risk, and investors love the idea of spreading out their risk over a broad variety of films.

The studios usually get a bit more control, often excluding their sure thing movies from the slate (Disney's

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[DIS  Loading...      ()   ]  Kingdom fund excludes the 'Pirates' Franchise). Some new companies have been created solely to profit from this new business. Ryan Kavanaugh's Relativity Media funneled more than $3 billion of investment into the movie business in three years alone, continuing to push money into the industry, and taking a handsome cut of each deal.

So what now? Well the deals that are in place are unlikely to budge. I interviewed Tom Eagan, Oppenheimer's analyst who covers Lions Gate, who said enough of the financing is in place that it would be tough for anyone to back out. And a number of financing deals have closed recently. Warner Brothers

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[TWX  Loading...      ()   ] partner Legendary Pictures just refinanced-- basically getting more leverage so it can make more movies--with the same chunk of money. And Lions Gate

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[LGF  Loading...      ()   ] just secured some $350 million from the Quebec government's investment arm. (German pension funds used to invest quite a bit in Hollywood as well).

Eagan told me that Lions Gate is just fine, because with this new chunk of investment they won't have to raise money for a while. But as bullish as he is on the company, he said that Lions Gate would likely have a hard time raising more money at this particular juncture. Roy Salter of the Salter Group (which advises on film financing deals) says it's not that financing is harder to come by, it's that it's just a slower process--investors will take their time evaluating deals.

I just got off the phone with the person closest to the heart of this film financing world--Ryan Kavanaugh himself. He told me "it's a harder time to raise financing than it was six months ago, but I think it's a really good thing." He says that the high yield return on film finance deals was so good that a lot of people were rushing into the space that didn't quite know what they were doing. "Because the money was so cheap there were so many people chasing the same deals," Kavanaugh says. "Back then it was harder to close deals because there was lots of stupid money."

A tighter credit situation means that the deals that do get done, will be smarter. So don't expect so many, or the kind of refinancing that Legendary just did, but the unexpected success of films like "300" means Hollywood will continue to find curious investors.

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