The man who sold the world: Bowie, bonds and IP securitisation

by DLA Piper
Contact

The loss of David Bowie at the start of this year prompted much discussion of his musical legacy, but less well-publicised was his contribution to finance.

In 1997, rather than renew a long-term record label contract, LA banker David Pullman convinced Bowie to securitise the rights to receivables from his back catalogue into what quickly became known as "Bowie Bonds". Paying 7.9% over ten years (compared to 6.4% from comparable US treasury bonds at the time) the US$55 million issue allowed Bowie to buy out an old manager who retained a large stake in his songs. Fans who hoped to own a piece of Ziggy Stardust were disappointed, however, as the entire issue was sold to Prudential Insurance.

Bowie's move, as so often, was prescient. Whereas mortgages had been packaged into financial instruments since the 1970s, the Thin White Duke was the first musician to use future royalties to underpin a bond. Other big names including James Brown, Marvin Gaye and even Iron Maiden soon followed suit, forming part of a new wave of securitisations in the early-to-mid 2000s backed by ever-more innovative income streams.

Another such front-runner in this burst of IP securitisation was the film industry. Studios have always sought to reduce their exposure to the volatility of box office performance, and securitisation provided a means of shifting some of that risk onto the credit market, with studios issuing an aggregate par of more than US$14 billion in film-backed bonds between 2005 and 2010. The bonds were funded by rights to a portion of the revenues from a slate of upcoming films, often supported by a library of older movies whose long-term income from channels such as pay-per-view and merchandising were more established.

Film bonds, however, demonstrate an issue common to a number of forms of IP securitisation, including music royalties, in that as an operating or future flow asset (as opposed to a financial asset such as an auto loan) they are especially dependent on the ongoing input of the collateralising IP’s creator. Whereas Ford, having provided the initial finance, has little direct control over whether borrowers ultimately pay for their Fiestas, a major studio often controls almost every element that determines a film’s financial success – from pre-production budgeting right through to free television distribution some five or more years later.

This degree of control allowed for a gradual divergence of interests between investors and studios, which eventually caused film bonds to lose popularity. Paramount’s US$300 million 2004 bond was the first to be issued unwrapped with a Moody’s rating of less than Aaa (Baa2 in this case), and as the popularity of such products increased, further risk was transferred to investors whose acceptance of such was due in no small part to the perceived glamour of the industry. The reimbursement of often uncapped studio costs – especially the notoriously expensive and malleable "P&M" (Prints and Marketing) – moved above bondholders in the payment waterfall. Doubts also arose over revolving structures which committed investors to buying those of a studio’s films which met given criteria such as budget or age rating, with a perception that filmmakers were tailoring the most attractive blockbusters to fall outside those profiles whilst plucking turkeys to fit. This problem was exacerbated because whilst most other securitisations might include performance triggers that terminate further funding of assets when early purchases underperform, reverting to a rapid payment waterfall, with film this made mezzanine and equity debt too difficult to sell. The result was that when, following a film’s underperformance, senior debt holders wanted to stop funding new movies and take advantage of the protection of mezzanine and equity debt, those junior investors would instead push to acquire as many new rights as possible in the hope of financing a success. The most recent securitisations, such as last year’s US$250 million issue by Miramax (the company behind hits such as Pulp Fiction and Shakespeare in Love) have tended to try to avoid these issues by focusing on film libraries rather than upcoming slates.

Similar problems of misaligned interests are evident with Bowie, who issued his bonds whilst simultaneously predicting the death-by-Internet of the copyright systems that underpinned them. "Music," he told the New York Times, "is going to become like running water or electricity". Two years later, 1999 saw the music industry’s global revenues peak at US $39.7 billion. That summer, Sean Parker and Shaun Fanning launched Napster. By 2004 piracy and a shift in consumer tastes from HMV albums to iTunes singles prompted Moody’s to downgrade the bonds from A3 to Baa3. By contrast Bowie had already, in his words, turned to face these strange changes and was using some of the proceeds of his issue to invest in an Internet service provider and online banking platform, whilst focusing his musical efforts on the remaining reliable revenue stream – live performance (the receipts of which were not included in the bond).

Few music royalty-backed securitisations have followed the initial flurry after Bowie Bonds, partly because of the issues already covered, but also because few musicians have the back catalogue to sustain repayments. Those that do – the Beatles, for example – rarely enjoy straightforward ownership of the rights involved. More success has been found in financing the receivables of the rights of the songwriter (the other major right besides the musician’s in a piece of music), as these are more often owned directly. However, ownership issues have impeded attempts to securitise IP receivables from a variety of popular sources, for example sports stars whose image is often tied to a range of sponsorship deals. Added to this more recently is a tighter regulatory environment, with some even seeing Bowie Bonds as emblematic of the appetite for ever-more exotic structures that eventually fed into the financial crisis. Evan Davis, the BBC’s economics editor and presenter of Newsnight, has even suggested (tongue only partly in cheek) that David Bowie caused the Credit Crunch.

Despite these setbacks, some financiers continue to look for ways to adapt such securitisations for the next credit cycle. A San Franciscan company has demonstrated that tradable sports star-backed securities can work on a small scale, whilst securitisation has even been mooted as a solution to student debt, where students would sell rights to their future earnings in return for upfront payments to cover their education. As a means of diversification, where performance is not directly linked to the financial markets, variations on Bowie’s idea continue to capture investor interest.

[View source.]

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.

© DLA Piper | Attorney Advertising

Written by:

DLA Piper
Contact
more
less

DLA Piper on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.