IP Innovations Financial Services, a guarantor of loans secured by intellectual property, has closed a deal on a $15 million revolving credit facility with Cambridge Display Technology, marking IPI's second transaction.

Under the agreement, IPI provides credit enhancement to London-based Lloyds TSB, enabling the bank to underwrite the $15 million facility. CDT develops next-generation technology for flat panel displays like those used in computers, cell phones and PDAs. There are currently more than 100 patents in the company's portfolio.

"The curious thing about this deal from a financing standpoint is that the technology is just on the cusp of commercialization," said Keith Bergelt, senior vice president, IPI.

In other words, the technology has not actually been put to use, which makes establishing a deal flow pipeline challenging. Bergelt received a lot of questions about how this could be done absent a steady royalty stream. "When there are a lot of royalties already coming in, it is easier for people to get their mind around it because then you can lend against the discounted cash flow analysis of that royalty stream."

In this instance, IPI assessed the market value for this technology using what existing display makers - such as Sony or Samsung - would pay for exclusive rights to the technology as a gauge. Additionally, projected royalty streams were based on predictions from industry analysts and other market players over a five-year horizon. Based on this analysis, Bergelt is confident that his firm has a firm grip on where the technology will be heading over the next several years.

"However, new technologies tend to slip in terms of their introduction into the market, so it was very much a careful assessment of the risks and the adoption of an LTV that we think is very conservative," Bergelt said. "We feel that we're in an excellent position to be able to be made whole in the event of a default."

IPI has access to future patents as well as those already included in the portfolio, including all royalties and up-front licensing fees. In the event of default, IPI has established a first lien position with the patent and trademark offices where these patents are filed.

The fact that CDT is a portfolio company of Kelso & Co., the New York-based private equity firm that purchased the portfolio in 1999 for upwards of $120 million, provides an extra measure of comfort. "The private equity firms tend to give us more confidence. They are not about to let the patents walk by allowing the company to miss a payment," Bergelt said.

The guarantor's first deal was a term loan written for less than $10 million to ADT, a provider of thermal and acoustic insulation products for the automatic and appliance industries. Securitization heavyweight GMAC Commercial Finance was the underwriter on that transaction (see ASR 3/8/04).

IPI plans to wrap another deal for GMAC later this month, backed by an established consumer brand, Bergelt said.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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