With major investment banks testing the waters, Intellectual Property (IP) securitizations have been seeing a lot of activity lately.
"From an IP perspective, it's been the perfect storm in the last 18 to 24 months," said Laura Fazio, managing director and head of media and entertainment at Dresdner Kleinwort's global banking division. "Three factors are converging to create tremendous activity: liquidity in the market driven by the rise of hedge funds, an appetite for nontraditional assets and a willingness to dig into more sophisticated modeling and analysis than credit cards and auto receivables."
Just last week, Goldman Sachs closed a $200 million IP securitization for iHOP backed by substantially all of the intellectual property and franchising assets of the pancake chain. "The IP securitization structure provides us maximum financial flexibility for the future," said iHOP director of investor relations Stacy Roughan. Although the deal is wrapped, Roughan declined to name the guarantor. Goldman Sachs, meanwhile, declined to comment.
But the iHOP deal is just the latest in a string of IP securitizations. Last month, another brand name, Domino's Pizza, announced plans to issue $1.85 billion in asset-backed securities, funded by franchise fees from its stores in a deal that Lehman Brothers is underwriting.
Also, last May, Dunkin' Brands, which runs the Dunkin' Donuts and Baskin Robbins franchises, closed a $1.7 billion IP securitization, the largest to date.
Most onlookers are expecting the next couple of years to play out in similar fashion to the previous 12 months. According to Jay Eisbruck, managing director in Moody's Investors Service asset-backed group, the most active areas this year will be restaurant franchises and films, and he predicts that around 10 new IP securitizations will be issued this year.
"On the franchise side, I think that now that we've gotten a few successful transactions completed, some other chains will want to pursue the same route. It's a lower cost of funding than straight corporate bank loans," he said.
But the potential for IP is endless, and many insiders are talking about IP securitizations of books, photography catalogs, sports broadcasting rights, sponsorship and advertising, as well as TV shows and video games.
"No one has done a TV or video game deal, and we're looking hard at those sectors," said Dresdner's Fazio, "There are very tangible opportunities."
Another possibility - one that could represent the next gold mine - is when companies learn how to extract value from their "strategic patents," which are not necessarily associated with royalty streams. Those patents are valuable not for their cash flow, but because of what they allow brands to do.
"The value of such strategic patents is rarely recognized by financial institutions," said Bruce Berman, president of Brody Berman Associates. "There are literally trillions of dollars of hidden value locked up in selective, big-company patents that, by providing freedom to operate, are invaluable to maintaining market share and profit margins. This is the life blood of most large companies."
However, there are some roadblocks as well. For instance, the uncertain nature of IP in the music industry might explain the disappearance of single-artist transactions. Worries about obsolescence are not confined to music, however. IP deals in the technology or pharmaceutical sectors are particularly susceptible to pressure from new advances or product enhancements.
And litigation is always a threat. One example that market watchers are keeping an eye on is the case of YouTube, which Google bought last year for $1.65 billion. Last week, Viacom sued Google, seeking more than $1 billion on grounds of widespread copyright infringement.
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