About 44 music catalogs from artists including Maroon 5, The Weeknd and Childish Gambino will serve as collateral for a $732.5 million asset-backed securities deal. All of the notes will be issued from one class in the current series of the Hi-Fi Music IP Issuer.
KKR Credit Advisors (US), LLC is the manager on the deal, Hi-Fi Music IP Issuer II, Series 2022-1, with FTI Consulting acting as back-up manager. The Bank of New York Mellon will serve as trustee on the deal, according to Kroll Bond Rating Agency.
KBRA is expected to issue an ‘A’ rating to the notes, which have an anticipated repayment date of five years, with a final maturity date in February 2062. The rating agency points to the proliferation of streaming as a positive aspect of the deal that could benefit the notes. While streaming platforms are ubiquitous, KBRA notes, that distribution method is still a growing market with low penetration rates overall.
“Consumption is increasing at a subscriber level and the entire music industry is growing as the number of users increase as well as the frequency at which they stream,” KBRA said.
The rating agency noted that Hi Fi Music IP 2022-1 has several structural features that provide enhancement to the notes, such as overcollateralization. The class A notes will receive 35% overcollateralization of the present value of the forecast valuation. Hi Fi Music 2022-1 also has an interest reserve account that is initially funded and sized to cover 12 months of interest.
Hi-Fi Music 2022-1 also will have excess cash flow, generated from the discount rate applied to the transaction valuation by FTI, minus the sum of interest rate and fees on the debt. The deal also has cash trap, rapid amortization and full turbo triggers based on the debt service coverage ratio (DSCR), KBRA said.
If the DSCR is less than 1.40x, but greater than 1.30x, the trust will trap cash at a rate of 50%. If the DSCR is less than 1.30x, the cash trap will be 100%, and if the DSCR falls to 1.15x, the trust covenants will trigger a rapid amortization.
