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Securitization charts new path in collecting music licensing fees

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Over 20 years ago, a groundbreaking bond deal involving David Bowie's recording catalog revolutionized the licensing of intellectual property assets. Now a collective representing musical artists is taking that securitization model a step further.

SESAC, formerly known as the Society of European Stage Authors and Composers, is set to unveil new asset-backed notes allowing investors to buy into the performance royalty revenue streams of songs by artists like Adele, Bob Dylan and 35,000 other musical acts.

Similar to whole-business securitization deals between corporations and franchisees, SESAC's model allows it to finance its operations and pay artists with the proceeds it raises from investors. The investors are then paid off with the licensing revenue from end users, such as sports stadiums and streaming services, that play the artists' music.

Next week SESAC will establish a price for a $560 million-asset-backed bond offering. The vehicle will be funded through the royalty streams the organization collects for the use of copyrighted songs that are played for public consumption.

The SESAC transaction is somewhat comparable with the so-called Bowie Bonds. In 1997, Bowie's entire catalog (including master recordings) was used to securitize $55 million in 10-year, fixed-rate bonds.

Yet the SESAC is deal is also fundamentally different. Rather than securing bonds from record sales, the Nashville-based organization is plying the income stream from its own agreements with the end users of copyrighted music to back a new whole-business securitization transaction engineered by Guggenheim Securities.

The deal more closely resembles the popular franchise-fee arrangements that fast food restaurants like Taco Bell, Wendy’s and Dunkin’ use to finance their chain operations. Under those deals, a chain's corporate headquarters raise funds from a securitization, which is in funded by the revenue-based fees paid by franchisees.

The SESAC transaction has preliminary triple-B ratings from Morningstar Credit Ratings and Kroll Bond Rating Agency for two tranches of notes in the deal, according to presale reports. The bonds are divided between a one-year tranche, the $30 million Series 2019-1 A-1 variable funding notes, and a $530 million A-2 notes tranche with an anticipated repayment date of July 2026.

The notes will be paid through existing and future music affiliate agreements that allow SESAC to enforce the intellectual performance rights of songwriters and publishers.

SESAC, with backing from the Blackstone Group, is the third-largest performance-rights organization in the U.S. Although SESAC is much smaller than long-standing performance-rights organizations like the American Society of Composers (ASCAP) and Broadcast Music, Inc. (BMI), it differentiates itself as a for-profit organization. It also has more frequent collection activity, according to Kroll.

ASCAP and BMI operate as nonprofits under consent decrees with the U.S. Department of Justice that restrict both groups’ licensing practices.

Business owners that want to play copyrighted songs in public usually license through all three organizations to cover as wide of a spectrum of music rights as possible, according to Morningstar.

SESAC itself collects revenues from U.S. affiliates usually with flat-fee arrangements that cover the use all songs in the SESAC catalog (the fees vary based on use). Also, SESAC has third-party arrangements with overseas performance-rights organizations to collect royalties internationally.

SESAC’s role in performance-rights enforcement and collection has grown more crucial as sales of CDs, cassettes and records have waned in favor of digital streaming services like Spotify and Pandora. Revenue from digital performances have risen from zero to 54% of industry revenues since 1999, according to Morningstar’s report.

Although classified as a whole-business securitization, SESAC has greater operational complexity than a restaurant chain’s franchise base, Kroll reported. SESAC continually negotiates renewals and contract terms with music affiliates and major licensees, and must track usage data that is “hard to categorize and stratify.”

Its unique risks include the potential nonrenewal of relationships with certain artists or publishers that bring in significant revenue. However, most of those deals run on a three-year contract basis, and SESAC has a 99% renewal rate with artists, Morningstar points out.

In SESAC's 2019 fiscal year, which ended March 31, 32% of its revenue was derived from broadcasting rights, including radio and TV, and 39.5% from its Christian music licensing division.

Although only 15% was from digital music platforms, Morningstar says it believes “digital will remain its fastest source of growth.”

The deal is expected to close with a leverage of 6.4x on a funded debt basis, which Morningstar said was “on the high end” of the range of recent whole-business transactions (5x to 7x).

SESAC’s entry into whole-business securitizations continues an expansion of the concept into different types of businesses outside the traditional dining chain sector. In the past two years, masseuse services outfit Massage Envy and gym operator Planet Fitness have issued bonds backed by the revenue streams of its franchise store base.

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Whole business securitization