NEW YORK - Rumor and innuendo notwithstanding, the intellectual property securitization sector has been quiet for the past year. However, market participants are talking up a comparatively vigorous pipeline, including a pharmaceutical royalty-backed deal in the works.
"We are hoping to see another drug royalty closing by the end of this summer," said Peter Walsh, managing director and co-head of origination and structuring at Harris Nesbitt, speaking at Strategic Research Institute's Intellectual Property Financing and Securitization conference last week in New York.
Speaking at the same event, Ambac managing director Harris Mehos said that he expects to see more opportunity opening up in the music publishing sector in the coming year. "I think we'll see a resurgence in terms of accessing the securitization market [on the publishing side]," Mehos said.
While sounding an optimistic note, panelists acknowledged the numerous barriers to a successful securitization in the IP arena. Often times, it comes down to simple economies of scale, said Robert Horowitz, a director at Credit Suisse First Boston. Some potential deals can be as small as $1 million, which would barely cover legal fees.
Furthermore, many of those who hold IP assets are unaware of the opportunities available to them in the securitization market. "We are dealing with borrowers who are not financial institutions; securitization is not top of mind," said Robert Krugel, a managing director at Lehman Brothers. "When it does get done, it is private equity owners looking to monetize their properties without selling equity."
The other likely target would be a distressed operating company with substantial royalty agreements, such as was the case with the $75 million Guess? Inc. deal, which closed in 2003.
Another fatal issue could be a nonassignability provision associated with the assets, said CSFB's Horowitz. Such a hurdle arose with the $225 million Royalty Pharma transaction, which closed in July 2003. The transaction addressed this through structure, though Horowitz did not elaborate.
The lack of historical data and seasoning on the assets can also be a problem. "Future flows on pharmaceuticals is pure conjecture, so you need seasoning," said Lehman's Krugel.
Moreover, it can be difficult to secure the necessary ratings on these transactions, and they are often linked to the corporate rating. The connection between the corporate entity and the IP can be particularly difficult to unravel when there is a strong creative component, such as in the apparel or restaurant industry, said Krugel. Some have proposed the back-up servicer be used to separate the issuer and the corporation. Depending upon the circumstances, this can be an effective tool, Krugel said.
For example, servicing a pharmaceutical portfolio is a fairly passive role, which would make it easier to maintain a back-up servicer as an independent party to the securitization. However, in some areas, such as in the entertainment sector, the servicer duties require a high level of industry expertise. This can result in a direct competitor being the only viable alternative, panelists said. If the role of the back-up servicer is primarily administrative, it is easier to rate the transaction above the corporate rating, said a ratings analyst from Standard and Poor's.
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