Issuers and investors have flocked to the second lien loan market over the past year-and-a-half, sparking U.S. second lien volume of at least $12 billion in 2004 alone - the most on record. This heightened popularity of the often yieldy debt product has caused arrangers, especially those in the asset-based middle market area - to source collateral for second lien credits in more creative ways than ever before. One particularly creative method is with intellectual property, which is known as a "soft" source of collateral.
To be sure, IP collateral has become more accepted, as second lien lenders are now more acute to a company's enterprise value. "We prefer lending on IP because it's the asset that is unique to the trade name," said Colin Cross, a managing director with Back Bay Capital. And some lenders are drawn to IP-type assets because their value is not directly linked to the strength of the stock market or economic cycles, further noted David Pullman, CEO of The Pullman Group LLC.