Bloomberg News

Bollywood Exiled by Asia’s Highest Borrowing Costs: India Credit

October 24, 2011

Oct. 24 (Bloomberg) -- The highest borrowing costs among Asia’s biggest economies are forcing Indian filmmakers to shoot fewer movies or rely on tax breaks from the U.S. or Europe.

State-run IDBI Bank Ltd. lends at around 16 percent to studios, compared with 13 percent for utilities, Executive Director R.K. Bansal said in an Oct. 17 interview. That’s three times more than six-year funding costs for Burbank, California- based Legendary Pictures Inc. in June. Bollywood can cut costs by 60 percent by tapping tax breaks or loans overseas, Shah Rukh Khan, the best-paid Hindi film actor, said on Oct. 14. Mumbai- based Eros International Media Ltd.’s latest movie shows three bachelors flamenco dancing and throwing tomatoes on a road trip in Spain.

Funding costs may rise further in Asia’s third-biggest economy as the central bank tries to stem inflation by boosting interest rates to 8.5 percent tomorrow, the highest among the region’s 10 largest nations, according to the median estimate in a Bloomberg survey. The number of Hindi-language movies released this year may drop below 1,000 for the first time since 2004, from a record 1,325 in 2008, said Komal Nahta, editor of trade magazine Film Information.

“The risks have risen for financing films because of the interest rates, increasing production costs,” said Bansal of IDBI Bank, the biggest lender to the movie industry. “We see no respite in the near future. It’s not lucrative at all.”

The Export-Import Bank of India’s level of outstanding credit to moviemakers fell 20 percent to 865 million rupees ($17 million) in the year ended March 31, said Mukul Sarkar, chief manager at the lender, a government-run bank tasked with supporting global trade.

‘Suffering Will Continue’

“This business is significantly affected by the rising costs,” Mumbai-based Sarkar said in an interview on Oct. 17. “The suffering will continue.”

Movie makers are increasingly using so-called co-production treaties that India has signed with Brazil, Australia, the U.K., Germany, Italy and France to reduce the impact of rising financing costs, said Khan. His film “My Name is Khan,” about a Muslim in San Francisco at the time of the Sept. 11 attacks, was co-produced with Twentieth Century Fox Film Corp.

Actress Ursula Andress presented film maker Yash Chopra with an award from the Swiss government for boosting tourism revenue after shooting sequences of lovers cavorting among its Alpine meadows and chalets, according to the website of Yash Raj Films.

“These are difficult times and all of us should help each other,” Khan, who shot his 2001 movie “Kabhi Khushi Kabhi Gham” in the U.K and plans to make his next movie in Miami, said in an interview in Mumbai. “With treaties we can make bigger and better films.”

Legendary Pictures, the film production company behind “Inception” and the “Hangover” movies, paid about 4.75 percent on a $200 million six-year loan deal signed in June, according to data compiled by Bloomberg.

Fuel Prices

Wholesale-price inflation in India quickened 9.72 percent in September, staying above 9 percent for a 10th month. Price growth has been accelerating as the cost of food and fuel increases. Oil prices have climbed 10 percent this month and India is the world’s fourth-largest petroleum consumer.

The 11 percent drop in India’s rupee, the worst performing among Asia’s 10 most-traded currencies this year, is also increasing costs for filmmakers. The rupee rose 0.2 percent to 49.90 per dollar in Mumbai today, after touching 50.32 last week, the weakest level since April 2009.

Yields on the government’s 7.8 percent rupee-denominated notes due April 2021 gained one basis point, or 0.01 percentage point, to 8.83 percent, a three-year high, according to the central bank’s trading system. The yield on the benchmark 10- year bond has climbed 91 basis points in 2011. Indian rupee bonds returned 2.5 percent this year, the worst performance among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc. Chinese yuan debt returned 3.4 percent.

Rising Yields

The difference in yields between India’s notes due in a decade and similar-maturity U.S. Treasuries was 662 basis points, compared with a record-high 676 reached on Oct. 3.

In the corporate bond market, the gap in yields between India’s top-rated five-year rupee debt and similar-maturity government bonds has widened to 100 basis points, near this year’s low of 99 basis points set on July 29.

Countries such as Spain are banking on an increase in tourism revenue by attracting filmmakers from India with tax benefits and lower levies, according to Kamal Jain, chief financial officer at Mumbai-based Eros International.

Tax Breaks

European tourism officials want to attract India’s middle class, which according to McKinsey & Co. may to grow to 583 million in 2025, from 50 million people in 2007.

Eros International, which co-produced the movie “Zindagi Na Milegi Dobara,” along with Mumbai-based Excel Entertainment, saved as much as 30 percent through tax breaks from Spain when making the film, Jain said in an interview on Oct. 15.

“Costs have certainly increased in the past few years, just not for us but the economy as a whole and ways to reduce them are very few,” Jain said. “As producers, we are looking at subsidies from more countries. Producers face the same pressure as that of a machine manufacturer when costs go.”

Amid declining ticket prices, collections from domestic movie-ticket sales dropped 12.7 percent to 64.5 billion rupees in 2010, and 13 percent to 81 billion rupees in 2009, Nahta said.

3-D Boost

The Indian film industry may reverse a two-year decline as producers focus more on 3-D to boost revenue, PricewaterhouseCoopers LLP said in a report released in July. The industry will grow 9.3 percent a year until 2015 after a slowdown of almost 8 percent in 2010, according to PricewaterhouseCoopers estimates.

The cost of insuring the debt of State Bank of India against non-payment using credit-default swaps has almost doubled this year. Five-year swaps on the lender, viewed as a proxy for the nation, cost 310 basis points on Oct. 21, up from 161 basis points at the end of December 2010, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets.

The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

“Two years ago we were able to recover the money before a film was released” as producers signed a lot of marketing deals, while now lenders have to wait for payment after the movie is released, IDBI Bank’s Bansal said. “The overall costs have increased due to inflation and have heightened the risk to the extent that model of financing has changed.”

--With assistance from Ven Ram in Singapore and Rob Golum and Michael White in Los Angeles. Editors: Arijit Ghosh, Sam Nagarajan

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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