Currency Exchanges: Why They Are Needed and How To Avoid A Pitfall

by Reed Smith

Executive summary

  • Currency exchanges are needed during the production of most films and some television programmes
  • That can result in a currency loss or gain
  • Financiers need to be sure any currency loss is covered before they commit to fund: there is a “chicken and egg” problem here
  • A traditional way of dealing with any loss is for the production to defer fees, but this has adverse consequences to any financier who is relying on the UK tax credit for repayment which are rarely considered

The currency issue obscured

Most production companies prepare their budgets and finance plans in a single currency (usually, for British productions, sterling) so that they look something like this.










Presale loan




Gap loan




Equity funding




Tax credit loan




Total financing




This, however, obscures two realities.

Expenditure often needs to be incurred in more than one currency. For example:

  • There may be some shooting, postproduction or processing abroad which will involve expenditure in the local currency (for example, euros, forints, kroner etc.)
  • There may be some postproduction or processing work done abroad
  • Some talent (particularly U.S. talent) may want to be paid in their local currency (e.g. U.S. dollars)
  • The premium for U.S. dollar-denominated errors and omissions insurance is often payable in U.S. dollars.

Most financiers provide financing in the currency in which they expect to be repaid. So, if they lend against the UK tax credit for a film, they will lend in sterling, and if they lend against contracted or projected distribution receipts, they are likely to lend mainly, or exclusively, in U.S. dollars, since most distribution agreements provide for payments in U.S. dollars, although some may be denominated in sterling or euro. Financiers usually do this because they do not wish to be exposed to currency risk when the repayment revenues are received; and financiers prefer to do the currency exchanges when they fund rather than when revenues are received because they will not wish to enter into forward exchange contracts to convert repayment revenues back into the funding currency because of the uncertainty of whether, and when, such repayment revenues will actually be paid.

The currency issue clarified

The production company needs to produce a “split budget” showing the amounts and currencies in which expenditure will actually need to be made. Where there is a completion guarantee for the production, this will then form the “strike price”, which is the amount that has to be funded as a condition to the completion guarantor being obliged to complete and deliver the film. The production company should also prepare a finance plan denominated in the currencies in which funding will be provided so that it looks something like this:
















Presale loan






Gap loan




Equity funding




Tax credit loan




Total financing








Currency surplus/(deficit)








It is unlikely that amounts and currencies in which funding is provided and in which expenditure actually needs to be incurred will precisely match, so this exercise will enable the production company to see what currency exchanges will be needed and to ascertain which rates will produce a loss and which a gain. In the simplified example above, US$3,112,500 needs to be converted into £1,800,000 and €330,000. Experience shows that:

  • This exercise is often left too late: it should be done before the process of closing documents commences so that the potential issue of a currency loss is addressed early
  • There is more often a currency loss than a gain: which can only be a function of production companies tending, when they produce their initial single-currency budgets, to assume exchange rates that are too optimistic


There are two timing issues. The first is the “chicken and egg” situation, in which:

  • Financiers are unwilling to commit to fund until any currency shortfall has been funded; but
  • Banks do not wish to enter into forward exchange contracts with the production (almost always a special purpose company) until they know the funding is in place and the forward exchange contracts will be capable of being fulfilled

One solution to this is to have the funding paid into escrow and released only when the currency shortfall is funded (and refunded if that has not occurred within a prescribed period). Another is to have a company of substance (which might be the producer’s main trading company) agree to underwrite the cost of unwinding the forward exchange contracts should the funding never be received.

The second issue arises where there are multiple funders who fund in a prescribed order, rather than providing all their funding at closing. In this case the prior funding has to be spent before the later funding. So if, for example, the first funding to be provided is in U.S. dollars and the last funding to be provided is in sterling, and U.S. dollars need to be spent late in the day during postproduction (and all other expenditure is in sterling), the U.S. dollar funding will need to be converted to sterling and some of the sterling funding into U.S. dollars (unless the financiers can be persuaded to allow some of the U.S. dollar funding to remain in U.S. dollars and unspent at the time the sterling funder starts funding, ready to pay the postproduction expense in U.S. dollars when it arises).

How to deal with a currency loss

Typically currency losses are dealt with in two ways. Either the production advances more cash, or it procures deferments (often of its own fees) equal to the shortfall. The second is the more usual, because productions rarely have access to cash beyond the funding they have already secured. A third possibility is to use part of the contingency to pay for the shortfall. However, a completion guarantor is most unlikely to agree to this (unless the amount is very small) because it requires the contingency to be available to overcost risks to which it is exposed, and currency losses is not one of them.

The problem with deferments

The problem with dealing with currency loss by a deferment arises if part of the financing has been provided on the basis of the estimated UK tax credit for the film and the amount that is to be deferred would have attracted UK tax credit. If the deferment is, for example, sunk development costs, the problem does not arise as these do not attract UK tax credit; but if (as is often the case) it is budgeted producer fees or fees payable to cast or crew, the problem does arise. Where the problem does arise, any financier lending against the tax credit should require:

  • That the deferment is “grossed up” to take account of the likely reduction of the UK tax credit
  • That the financier’s funding is reduced by the difference between the currency loss and such “grossed up” amount
  • That the strike price is deemed reduced by the “grossed up” amount

The “grossed up” amount needs to be calculated on a case-by-case basis. If the financier is lending 100% of the estimated tax credit, it needs to be 133.33% of the currency shortfall. An example will illustrate this. If estimated UK qualifying expenditure (excluding the deferment) is £1,000,000 and tax credit is payable at 25% (as it will be for most independent British films), then the tax credit estimate will be £250,000. If there is a currency shortfall of £100,000 then £133,333 has to be deferred. The estimated tax credit, and amount the financier will be able to lend against it, is now £216,667 (25% x £866,667). So £100,000 of the £133,333 deferment covers the currency shortfall, and £33,333 is needed because this is the amount by the tax credit lender’s loan has decreased. The figures will of course be different (and the required deferment slightly less) if the tax credit lender is lending (as is more typical) 85-90% of the estimated tax credit.

…and what if there is a currency gain?

Producers might argue that since they take the hit if there is a currency loss, they should have at least a share of any gain. But that will always be a subject for negotiation with the financiers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

Written by:

Reed Smith

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