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What is bond insurance?
An issuer of a bond can purchase bond insurance to guarantee scheduled payments of interest and principal on the bond to its bondholders in case the issuer defaults. Once the issuer purchases bond insurance, its credit rating is replaced with the insurer’s credit rating. Premiums are a measure of the perceived risk of failure of the issuer and are paid to the insurer in either lump sums or installments.
What are the benefits of being bonded?
Being bonded gives issuers the ability to leverage business growth. With the increased stature of having the insurer’s credit rating, a business can feel safer in taking risks to improve and grow the business. This is especially true in the construction and financial industries.
A bonded business can obtain unbiased criticism from a credit professional and seek advice in underwriting projects.
Some bonds we handle include, but are not limited to, the following:
- Motion Picture Completion Guarantee/Completion bond
- Contract performance bonds
- TRO bonds
- Injunction bonds
- Bid bonds
- Maintenance bonds
- Payment bonds
- Supply bonds
- License and permit bonds
- Miscellaneous bonds
Motion Picture Completion Bonds
A completion guarantee (sometimes referred to as a completion bond) is a form of insurance offered by a completion guarantor company (in return for a percentage fee based on the budget) that is often used in independently financed films to guarantee that the producer will complete and deliver the film (based on an agreed script, cast, budget and schedule) to the distributor(s) thereby triggering the payment of minimum distribution guarantees to the producer (but received by the bank/investor who has cash flowed the guarantee (at a discount) to the producer to trigger production).
The producer will agree to deliver a film (based on an agreed script/cast/budget and schedule) to a distributor in respect of certain territories in consideration (inter alia) for payment of a "minimum distribution guarantee" payable at the point in time when the producer has delivered the completed film. The producer obviously requires such funds upfront to finance the film so the producer takes the signed distribution contract to a bank/financier and will effectively use it as collateral against a production loan. It is at this stage that the bank will require a completion bond to be executed to provide them with the required level of security against the risk of non-delivery by the producer. The parties to the completion bond agreement are typically the producer, the financier(s), the completion guarantor company and the distributor(s).
These methods of funding can be complicated and expensive due to legal, bank fees and interest. The bond fee itself is negotiable—typically 4–10 % depending on the risks as assessed by the completion guarantor. The first proceeds from distribution will go to pay off any loss of the bonding company. For these reasons, completion bonds are used on low to high-budget independent films.
The “strike price,” or the “production price” is the amount that the completion guarantor believes will be needed to finish and deliver the film. The production price comprises of the budgeted cost (all production costs including above and below the line cost), the completion guarantor’s fee including fringes and insurance costs and any contingency allowance. For the completion guaranty to be effective, the full amount of the strike price must be made available for production of the film.
Key to the completion guarantor company's risk assessment process will be a careful scrutiny of key persons on the production team to determine whether the film is "bond-able". Of particular interest will be the director, first assistant director, line producer, production manager, producer, cast and cinematographer, since these personnel will ultimately be responsible for keeping the production on budget and on schedule.
The completion guarantor will require a regular (usually daily) flow of production paperwork—for example, production reports, cash-flow and cost reports etc. Under the bond agreement, the completion guarantor has the contractual right to "take over the film" (which will include wide "hire and fire" rights over any personnel including the director) since they are financially liable if the film goes over budget. In extreme circumstances, films are sometimes finished by the completion guarantor company (this infamously occurred during production of The Thief and the Cobbler)—an event that is traumatic for the crew and cast, and can be disastrous for a film's creative and commercial ambitions. However completion guarantors also know that it is usually in their interests to work with an established production team to assist them to bring a production back onto schedule and within the agreed budget.
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