Though showing promise of great things to come, intellectual property securitization still remains underdeveloped as a broadly accepted asset type, and hence only a handful of players are well-educated in the asset class.
Having participated in the deals from the very beginning, Structured Finance Advisors has pioneered the investor's role in the intellectual property asset class, as well as a slew of other obscure assets, including 12b-1 fees, leasing containers, and tax liens. The company is currently looking at a tobacco litigation fee deal.
"Historically, our focus has been to pursue the newer asset types, especially early on in their development, because of the incremental value-added," said Jennifer Quisenberry, a managing director at SFA.
Including the DreamWorks SKG securitization, the company has participated in seven intellectual property deals, for a combined value of approximately $100 million.
Interestingly, in June, SFA became one of the first firms to launch a collateralized bond obligation backed entirely by asset-backed securities. Not surprisingly, the CBO includes a variety of esoteric asset classes, both senior and subordinate bonds, with an investment-grade weighted average rating.
"It's a high quality portfolio representing diverse and varied asset types, and brings to bear our experience, data base of information and niche focus," Quisenberry said.
The $250 million deal was called SFA Collateralized Asset-Backed Securities I Trust. The firm is in the process of gathering collateral for its second ABS repackaging, slated for the first quarter, Quisenberry said. The 2001 deal will also be in the $250 million range.
Connecticut-based SFA was formed in 1993 by a group of investors looking to take advantage of opportunities in the private asset-backed securities market, where new asset classes are typically placed.
Quisenberry, who joined SFA in 1996, said that first-time issuer deals can take up to a year to complete, because of complexity issues, including legal and due diligence requirements. She coins true privates as "negotiated" transactions, as opposed to the more commodity-like Rule 144A and public markets, where numerous investors participate in a broadly marketed offering.
In fact, for most of the intellectual property deals that SFA has taken part in, the firm has been the sole investor.
"Many deals aren't big enough to justify involving more than one investor," Quisenberry said. "Also, from our perspective, being the sole and lead investor enables us to exert control and push for better structure and pricing."
SFA's mandate is risk-adjusted return, targeting higher yield, often at the expense of liquidity - a natural investment style for cash-flow CBOs.
Along those lines, SFA is willing to look at transactions that other, larger investors may not be interested in, for reasons of economies of scale.
"One of the things that is preventing [markets such as intellectual property] from growing rapidly is that these deals are exceedingly complex, and there are not a lot of players who can afford to take the time and effort that's needed to understand, analyze and structure these deals," Quisenberry said.
In addition to being an investor in private ABS, as its name implies, SFA is an advisor to other investors perusing new asset types.
SFA has approximately $2 billion in asset-backeds under management. Unlike most ABS investors - which are usually insurance companies and bank-affiliated asset managers - SFA is solely focused on ABS.
144 Market: Yea or Nay
For a firm like SFA, which has been predominately a true private market player, the growth of the Rule 144A market and decline in true private issuance has created challenges.
"We have seen a shift away from the true private market, which we view as a negotiated transaction between a buyer and a seller, or an issuer and a lender," Quisenberry said.
"We've been aware of this shift for a couple of years, and have been expanding our business to reflect that change," she added. "That's what partially brought us to the ABS CBO, because it is an effective way to participate in a 144A environment."
One the reasons for the shift to 144A placements is that the ABS market is being viewed as a maturing market, and asset-backed technology is more widely understood. More and more investors seem to be comfortable with 144A placements, despite the fact that some of these transactions types are fairly new, Quisenberry said.
"That's not to say that it's necessarily a bad thing, it's just that in some cases the 144A placement isn't giving investors the same timeline to review the transaction structure in detail and to perform due diligence," she said. "That's really the change: the time frame during which a transaction is ultimately brought to market has been squeezed."
Thankfully, new asset classes are being introduced all the time, and some not-so-new ones are still too complicated to be shopped anywhere but the true private market.
"The intellectual property market is still very much a true private market," Quisenberry said. "It's rarely a competitive situation. It's more of a negotiated situation, and one in which our firm has a great deal of experience."