A new system designed to place a monetary value on intellectual property may bring about an increased number of innovative IP asset-backed securities structures, making the securitization of revenue streams from intangible assets such as music royalties and other forms of intellectual property a hot market.

Charlottesville, Va.-based M-CAM, an IP assessment and monetization company, has teamed up with Zurich-based reinsurer Swiss Re New Markets to create a product known as Certified Asset Purchase Price (CAPP). The product, issued to qualified banks, enables IP assets to be used as collateral from companies seeking financing. M-CAM is selling the product, while Swiss Re will provide the insurance to back CAPP.

What the CAPP program does, essentially, is enhance the credit quality of deals that may have been viewed previously as having too much collateral risk.

"So from a credit quality standpoint, in those deals where there should be better asset coverage for collateral, the CAPP is an answer when there is some type of intellectual property or intangible asset that ... we can enhance," said David Ferron, vice president for business development at M-CAM.

Because of this new credit enhancement on deals with little or no material assets, increased securitization of these assets may be just around the corner.

"We anticipate the CAPP is intended to be an assignable option, so a bank that wants to sell off a loan can sell off the CAPP with it," he said. "It does lend itself to securitization concepts."

"I believe that M-CAM does have the capability of securitizing bundles of assets that they have issued their CAPP on," said Bill Hoffman, associate director of Swiss Re. "Our insurance product enables them to bring the banks on board so that the banks will accept IP assets as collateral for a loan. But what they then issue is essentially a put-option. They can later bundle the put options and securitize that."

The product is unique, in that it gives banks an option to lend to creditworthy companies with no inventory, such as service-based companies, rather than making an unsecured loan.

"Fundamentally, it enables banks to assign some collateral value to intellectual property," said David Paulson, vice president of risk reduction for M-CAM. "There are companies out there, good creditworthy companies that can't get bank financing ... because they don't have collateral."

"We give [the banks] a forward purchase offer on the IP, so they know at the end of the day, there's going to be some residual value there if they ever have to foreclose," Paulson added. If a foreclosure does need to occur, the bank can exercise that put option, giving M-CAM opening bidder rights at the foreclosure auction.

Ideas are floating around the market on how deals issued with CAPP-related assets will look. The transactions, however structured, are sure to ease the difficulty that currently plagues IP ABS issuers.

Ferron said he envisions a future version of this product that would enhance a portfolio of loans, rather than the single loan that the current version of CAPP provides.

"It just depends on how they want to structure it, if they in effect want to create a CDO type of structure by pooling together the loans," said Jay Eisbruck of Moody's Investors Service. "It's something that is possible; the difficulty has been accumulating a large enough size portfolio to enable the transaction to get done."

Eisbruck then added that if banks do exercise their put options and sell the loans to M-CAM, M-CAM may then become an issuer. "At that point the collateral becomes the property of M-CAM, and since they are the owner, they can ... securitize if they would like," he said. "They're the owner of the collateral - the initial owner before they sell it to the securitization - as opposed to some other third party."

While it is too early to say when securitizations under CAPP will be put into the market, the backing Swiss Re provides does show commitment to getting the IP sector to grow.

"I think it's a positive that a financially strong entity is showing a willingness to support transactions backed with this type of collateral because it has not been done a lot historically," Eisbruck said. "To the extent that [Swiss Re is] willing to provide this guarantee, it is a positive for the market, and can possibly enable more transactions to get done."

"Just about everything we do is trying to effectively create markets that are more liquid for assets or financing around such assets," Ferron concluded.

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