Credit crunch goes to Hollywood (beyond Main Street and Wall Street)

The recent 'credit crunch' in the markets should be readily apparent to all investors. The markets have sold off significantly as people are concerned that money will be harder to borrow, forcing a slowdown in the private equity market, a decrease in stock buybacks and a variety of other scary scenarios. The credit crunch is also obvious to many people on Main Street who have been interested in buying a new home or refinancing. It's not only the subprime borrower that's having trouble receiving credit at a reasonable price.

But there's one group of borrowers that you probably didn't think of -- Hollywood. According to the Financial Times, a variety of investment banks pulled their $1 billion underwriting deal from MGM. This financing was going to be used to produce new movies such as The Hobbit and a new installment of Terminator. MGM isn't worried, though. According to the article, none of these movies were slated to begin filming shortly.

It's interesting to understand the drastic consequences of difficult borrowing circumstances. Potential homeowners suffer, consumers who rely on credit to purchase goods suffer, hedge funds that rely on leverage suffer, LBO firms suffer, and so on.

One has to wonder if the credit situation will slow the movie business in years to come. Without the ability to finance production at a fair rate, many production companies are going to face a serious dilemma. Movie companies are notorious for their "hit or miss" nature by which a single movie can make or break the financial performance of a company during a given year. With this added concern, movie producers are going to have to think long and hard before entering new projects and borrowing to produce.