Box-Office Bonds Bet on Blockbusters
Morgan Stanley Fund to Let Investors Profit When Movies Do

By Neil Unmack
Bloomberg News
Tuesday, June 5, 2007

Morgan Stanley plans to sell bonds backed by revenue from movies made by Paramount Vantage, a studio whose films include the drama "Babel" starring Brad Pitt and "A Mighty Heart" featuring Angelina Jolie.

The fund will pay investors a return from box-office receipts, merchandising, pay-TV contracts and other revenue from films made or distributed by the Los Angeles studio over the next two years, said a person familiar with the financing who spoke on condition of anonymity because the deal is private.

Paramount Vantage, a unit of Viacom's Paramount Pictures, is among Hollywood studios taking advantage of demand from hedge funds, private-equity firms and banks to raise capital. Lions Gate Entertainment, the maker of Academy Award-winning "Crash," raised as much as $400 million from investors in May. Weinstein Co., the film company founded by Harvey and Bob Weinstein, hired Goldman Sachs Group in April to create a $285 million fund.

"There's lots of hedge fund and private-equity interest because of the glitz and the glamour, but there are economic benefits if the deals are done well," said David Joyce, a media analyst at Miller Tabak in New York. "Films generate fairly predictable cash flows over time, for example from DVD sales, pay TV, video-on-demand and broadcast TV distribution."

Five movie-backed bonds are likely to be sold this year, compared with three in 2006, according to Moody's Investors Service.

Banks, hedge funds and private-equity firms typically provide a portion of the cash needed to make or distribute a pool of movies through so-called slate financings, taking a share of the profit. The money is raised through combinations of equity, loans or asset-backed bonds.

Slate and similar movie-backed financings totaled about $8.7 billion since 2003, including deals by the Walt Disney Co., Sony and News Corp.'s 20th Century Fox, according to the Salter Group, a Los Angeles advisory firm that has worked with investors and lenders including Dresdner Kleinwort, Deutsche Bank and Soros Strategic Partners on movie-related financing.

Paramount Pictures set up Paramount Vantage last year to focus on "sophisticated films with a strong art-house sensibility," according to the company's Web site, as well as smaller-budget comedies and horror films.

"Babel," which won a Golden Globe award this year for best dramatic movie, was Paramount Vantage's first release. The studio will shortly distribute "A Mighty Heart," which tells the story Wall Street Journal reporter Daniel Pearl's murder in Pakistan.

"The profitability of the film industry has improved dramatically over the past five to 10 years since the arrival of DVD," said William Kidd, an entertainment analyst at Wedbush Morgan Securities in Los Angeles. "It's less risky and more profitable, so you're seeing interest from outside investors to get involved in these deals."

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