Could David Bowie have caused the last recession? Some of you may recall that this notion was bandied about in early 2009. It’s an idea as fantastic as the performer himself, but we thought it might be fun to discuss Bowie Bonds and some of the other things you might not have expected to have been securitized.
For those who aren’t familiar with the concept, let’s quickly review how securitization works. Securitization is the process of pooling the rights to the cash flow produced by a group of assets and selling those rights to investors in the form of securities backed by those assets, thus raising capital and distributing risk. An asset-backed security (ABS) is similar to a mortgage-backed security (MBS) but is typically backed by otherwise relatively illiquid financial assets such as car loans or leases, credit card debt, student loans, or a company’s receivables. These days, any debt that you owe any institution has probably been packaged into a securitization, but as it turns out, almost anything likely to generate future cash flow can be securitized—including music royalties.
The Bowie Bonds appear to be one more case of the innovative performer being perfectly in sync with the zeitgeist (or “spirit of the time” if you don’t speak German). In late 1996, investment banker David Pullman negotiated the deal with David Bowie’s business manager, William Zysblat. The idea was to issue private securities backed by the future revenue of 25 of Bowie’s albums recorded before 1990. Prudential Insurance Co. of America purchased the entire issue in January 1997 and held the 10-year bonds until they matured. During that decade, Prudential received the stipulated return of principal plus 7.9% interest per year, with the reassurance that if there was a default, the rights to 287 of Bowie’s songs served as collateral. The deal earned Bowie $55 million, a portion of which he used to buy back the partial ownership rights to some of his songs retained by his former manager, Tony Defries. By the time the bonds matured, Bowie was in the rare position of wholly owning the rights to most of his songs. It was likely a good deal for everyone involved.
MBS were developed in the early 1970s, and the first ABS was developed in 1985. Both types of securities became increasingly common during the ’80s and early ’90s, so David Bowie can hardly be blamed for their proliferation. However, while MBS and ABS were already common when Bowie Bonds were issued in 1997, it was probably one of the first times (and certainly one of the most widely discussed) that intellectual property rights had been securitized. It certainly wasn’t the last time though.
Subsequent securitizations of music royalties, sometimes referred to as “celebrity bonds,” were issued for Edward Holland, Brian Holland, and Lamont Dozier, the songwriting trio responsible for many Motown hits of the 1960s and ’70s; the songwriting duo of Nicholas Ashford and Valerie Simpson-Ashford; James Brown; the Isley Brothers; Dusty Springfield; Rod Stewart; and Iron Maiden. Moviemakers have also tested the waters: DreamWorks SKG issued a $1 billion securitization of rights to its movie catalog in 2002, and Vivendi Universal followed suit in 2003 with its own $750 million securitization.
Similarly, some companies have securitized income streams from trademark royalties. In 2000, Triarc received $290 million in a securitization deal involving future franchise fees and trademark royalties from Arby’s fast-food restaurants. In 2003, apparel company Guess Inc. completed a $75 million license fee royalty deal. Fashion designer Bill Blass was able to obtain $25 million by securitizing future licensing fees for his trademark. Drug patent royalties have also been securitized, including deals by BioPharma Royalty Trust for $80 million in 2002 and Royalty Pharma Finance Trust for $225 million in 2003.
While celebrity bonds may not have become quite as popular as David Pullman hoped, it looks like companies are going to continue to experiment with securitizing a diverse array of assets, including intellectual property rights. So, what’s the most interesting or unusual securitization you’ve heard about? Solar ABS, anyone? Let us know in the comments.