The impact of the subprime crisis has been broad and deep on Wall Street. The consequent economic losses and personnel layoffs (which, as of this date, may be far from complete) seem to be worse than at any other time over the last 25 years - at least in so far as it has impacted the structured finance sector of the market.
Notwithstanding this debacle, financing opportunities remain viable in certain select niche areas. One of these areas relate to financings backed by intellectual property assets: copyrights, trademarks and patents. This is, at a minimum, encouraging as we approach the tenth anniversary of the first and most heralded deal in the area - the David Bowie music royalty financing.
Copyrights: Music Royalties
Based upon over ten years of historical earnings from Bowie's music catalog, including most of his greatest hits, a securitization of his expected future royalty revenue stream was structured and closed in 1998. At that time, some were predicting a flood of new transactions to follow. Unfortunately, only a handful of transactions were closed.
Doing a music royalty transaction in today's environment although not easy would not be impossible. The industry has been in some turmoil since the era of file sharing and free downloads upended the traditional methods of delivering recorded music to the public.
Copyrights: Film Royalties
The largest of the copyright-based deals come not from the music industry, but rather, from Hollywood. Since 1995, over a dozen major transactions, ranging in size from $300 million to $1.1 billion, have been successfully completed. Each was highly negotiated with unique features driven, in part, by the nature and history of the studio which sponsored the deal. The most common characteristics of these transactions were that (a) most were sponsored by major studios such as Paramount Pictures, DreamWorks, Marvel Comics and The Weinstein Co., (b) many of them turned to monoline insurance companies to provide credit support in the form of a financial guaranty insurance policy, and (c) they all involved the financing of a slate of films not in existence at the time of deal closing.
There is great demand from the smaller and independent film makers to avail themselves of securitization finance. To date, they have had to rely on traditional and more expensive sources of capital:
* Self-funded equity
* Venture capital investors
* Grants from non-profits and governmental agencies
* Traditional bank loans
* Advances from distributors
Within a year after the Bowie deal was completed, a new transaction was initiated for the renowned clothing designer, Bill Blass. This financing embodied two important innovations - the first trademark based securitization and the first leveraged buyout to use securitization as the financing vehicle to raise the required capital.
This same approach was used to help the management of The Athlete's Foot acquire that company from its French conglomerate parent in 2002. This was the first time the technique was used for a leveraged buyout of a major franchise concept. The beauty of the technique we developed for Bill Blass and The Athlete's Foot was that the assets of the target company were used to pay a significant portion of its acquisition price.
A major and new development in this area is that a number of the more recent transactions, including the Arby's deal, the Dunkin' Donuts transaction, IHOP and Domino's Pizza have all been much larger. If, for no other reason than their size, these deals may prove to be very important in that they have served to show that there are billion dollar deals to be done in the trademark space.
Since the landmark $80,000,000 BioPharma Royalty Trust deal in 2000 and the follow-on $225,000,000 Royalty Pharma deal in 2003, patent-based securitizations have not captured many headlines in the financial press.
Much needs to be done, however, to overcome some of the difficulties in building volume in patent-backed deals. Expanding out from medical patents has not proved to be very easy. Among the many reasons for this are:
* the high barriers to bringing a successful drug to market make the financing of the related patents more stable than other types of patents with potentially short horizons to obsolescence;
* notwithstanding the myriad of technological patents in the world today, a large number are cross-licensed, making a financing extremely complicated, if not impossible to effect and
* diversifying risk by amassing a pool of valuable patents is very time-consuming and expensive.
In assessing the progress we have made over the first ten years, compared to other larger and more mature asset classes, I think one would have to conclude that it has been no more than modest.
However, a number of the recent developments mentioned above indicate that we may well have reached a very exciting point in the maturation process of this sector - one in which growth in volume, growth in deal structures and growth in the types of sponsor entities participating in the market will help to realize the sector's potential.
(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.