In 1999, the intellectual property (IP) and sports-related asset-backed markets experienced a number of firsts. These included the first ratings on transactions backed by future licensing agreements in the music and trademark areas, the first future film transaction to include a fund earmarked for distribution expenses, and the first asset-backed sports arena receivables-backed transaction rated by Moody's.
In 1999, Moody's rated a total of just under $1 billion in six privately placed transactions in the IP and sports areas (including a transaction priced in late 1999 that closed in early 2000), up from under $100 million in 1998. The assets securitized in those IP transactions included licensing receivables, music royalties, and income from future films.
For 2000, Moody's believes the market will continue to grow at a steady rate as more issuers in the intellectual property and sports industries become aware of the benefits of securitization versus traditional forms of financing.
Two New Music Transactions
In 1999, Moody's assigned ratings to two music royalty securitizations.
*An A3 rating on the Class A tranche of the Nick-O-Val, LLC transaction, which securitized the publishing royalties of the husband and wife songwriting team Ashford and Simpson.
*A Baa1 rating on IMH Holdings, which securitized both the record master royalties and the music publishing royalties of the "heavy metal" band Iron Maiden.
Numerous other transactions were proposed during the year but were delayed or canceled due to a variety of factors, including questions about the control of the assets to be securitized and decisions by the issuer to use alternative sources of financing.
Both of the transactions that were rated, which together totaled under $50 million, were single artist transactions in the same vein as the David Bowie and Holland/Dozier/Holland deals of prior years. In the single artist transactions completed to date, the assets have historically generated approximately $1 million to $5 million a year in revenues. As a result, if an investment grade rating is desired, these assets can only support transactions that are significantly smaller than in most other sectors of the ABS market.
Multiple Artist Pools
Since the template for the single artist transaction has been established, Moody's predicts that in 2000 a number of single artist transactions will be done but that their overall dollar volume will continue to be low.
Larger transactions are possible - and predicted by some market participants - in the future. Those transactions would likely include pools of assets from multiple artists, and could involve the assets of some of the larger record labels. However, development of the market in those directions will be dependent on the speed with which more participants become educated about the securitization process and the availability and costs of alternative sources of financing.
Let the Games Begin
Moody's rated its first asset-backed sports arena receivables transaction in 1999, the $315 million L.A. Arena Funding deal, which securitized revenues generated by the recently opened Staples Center in Los Angeles. This transaction, which received an A2 rating, continued the move of arena finance into the private (i.e. taxable) market and out of the public finance market where it has traditionally resided. The assets that were securitized included future payments for luxury suites and club seats, corporate sponsorships, and concessions.
The Staples Center transaction had a number of characteristics that lowered the deal's credit risk and are unlikely to be replicated in future transactions. First, the arena was located in a large market, which gives it high visibility and a large corporate base to which it can be marketed. In addition, the Staples Center is the only arena in the United States that is the home of three major professional teams (Lakers, Clippers, and Kings) in two major professional sports, providing a bit more diversification than would be available in other locations. The stability of the arena is also aided by the new National Basketball Association (NBA) labor agreement reached in early 1999, which is expected to lead to greater financial stability for the NBA's teams for at least the next five years. Two of the Staples Center's teams, the Lakers and the Clippers, play in the NBA.
In rating the L.A. Arena transaction, Moody's considered each of these favorable credit characteristics in conjunction with projected debt service coverage ratios. In future deals, Moody's will consider the extent to which similar characteristics exist, and if not, whether other structural strengths or stronger debt service ratios offset their absence.
2000 Could Reach $1 Billion
Interest in the sports finance area continues to grow as franchise values and the costs of building new arenas increase. It is yet to be seen if the ABS market will be the market of choice to finance these projects, but Moody's expects to see continued growth, possibly reaching $1 billion in issuance, in the sports and arena receivables market in 2000.
First Licensing Deals
The Universal Credit Trust 1999-A and 1999-B were two other landmark IP deals rated by Moody's in 1999. These two deals securitized for the first time revenues generated by groups of present and future licensing agreements.
Universal 1999-A, which totaled $29 million, securitized the future revenues of the performing rights society SESAC. SESAC receives its revenues primarily from radio and television stations that license the right to play the music of SESAC's affiliated songwriters and publishers.
The transaction received an Aaa rating as a result of the support of a reinsurance agreement with Aaa-rated American Re-Insurance Co. (Am Re). Moody's also determined that the transaction would have been rated Baa3 without the benefit of the reinsurance.
Universal 1999-B, which received a Baa3 rating, securitized the future revenues generated by the licensing of the trademark of the fashion designer Bill Blass. Bill Blass has been one of the most prominent American designers of the last forty years, with a long history of licensing his name across a wide variety of different product lines. These include men's and women's apparel and housewares.
In addition to traditional forms of asset-backed credit enhancement, each transaction had features that enabled it to receive ratings significantly higher than that of the issuer's underlying credit. This was despite significant obligations of the issuer to assist in the generation of future revenues in its role as servicer of the assets.
The first feature was a series of triggers built into each structure related to the financial condition of the servicer/issuer. Essentially these triggers gave investors the right to take control of the assets and place them with a backup servicer, before they lose considerable value and place future debt repayment at risk. In both cases a qualified backup servicer with specialized industry knowledge was in place at closing to take over management of the assets, should the original servicer/issuer underperform expectations or fall into financial difficulty. Since these backup servicers had specialized industry knowledge, the risk of a significant drop-off in asset performance due to a servicer/issuer bankruptcy was reduced.
Secondly, the amount of debt financed in relation to the asset's appraised value, or its loan-to-value (LTV) ratio, was low enough to provide a sufficient cushion for bondholders to be able liquidate the assets in order to repay the bonds if they underperform specified trigger levels. This further protects investors in the case the best efforts of the backup servicer are still unable to improve performance.
This protection is based on the assumption that the market value of some forms of intellectual property is related closely to its revenue-producing ability, and that the revenue-producing ability (and, hence, the market value) is unlikely to fall precipitously over short periods of time. It also assumes that there will be an available market ready to purchase this IP. Characteristics of IP that could enable it to fall into this category include:
*A well-established brand name
*A well-diversified group of creditworthy licensees using the IP
*Consistent cash flows over a long period
*Providing or enabling a unique service or image
*Significant barriers of entry for competitors
Moody's believed that the collateral in the Universal 1999-A and 1999-B transactions satisfied these characteristics enough to justify the assigned ratings.
The market for future securitizations in this asset class is potentially very large due to the large amount of license revenues generated each year. Here, again, the level of future issuance will depend on whether issuers that control trademarks find that the ABS market offers a lower all-in cost of financing than their historical sources of financing.
Lights, Camera - Transaction
The highlight of the year in the future film securitization market was the DreamWorks Film Trust II transaction, which priced in mid-December and closed in early January. Although the transaction was a refinancing of the DreamWorks Film Trust deal completed in November 1997, it was different in a number of significant ways. These differences included an upsizing of the senior debt to $375 million from $325 million in 1997 and the addition of a $165 subordinated tranche earmarked for the financing of distribution expenses, which was a first for a future film transaction. This subordinate tranche was supported by a reinsurance agreement with Am Re similar to the one used in the Universal 1999-A transaction and enabled it to earn an Aaa rating.
DreamWorks Film Trust II was also the first term future film deal that received a rating without the benefit of a guaranty from a third party such as a monoline insurer. The Baa3 rating of the senior tranches was based on the on the historical performance of live action films, DreamWorks' business plan, which includes access to significant capital, structural features in the transaction, including early amortization events, the grant to the trust of a perfected security interest in the films and proceeds generated by them, and other factors. The rating is also based on the expectation that DreamWorks will be able to produce a sufficient number of films so that the trust will benefit from the cross-collateralization of revenues across these films.
It is expected that at least one future film securitization will be completed in 2000. Under the structures that have currently been developed, total issuance volumes in this asset class are currently constrained by the ratings of the studios in the industry. It is often difficult for lowly rated or unrated studios to achieve investment grade ratings on their future film securitizations due to their ongoing obligation to produce and distribute the films sold into the trust. As a result, the market for these transactions tends to be limited to the major studios, a number of which have already securitized. Although it is possible for smaller studios to reach investment grade ratings through the use of third-party enhancement, issuance of this type has been rare to date and it remains to be seen if it will be undertaken in the future.
The intellectual property and sports-related asset-backed markets experienced a year of growth in 1999 expanding into a number of new areas. Structures were developed that expanded the asset class to include trademark receivables, licensing revenues, and future arena receivables. This activity allowed the market to grow to almost $1 billion in privately placed transactions, which was more than ten times the prior year's volume of transactions rated by Moody's.
Moody's believes these structures will continue to gain greater acceptance among issuers as they become more familiar with this financing technology. Though this process will not occur overnight, we expect the market to continue to grow steadily in the coming year.