Intellectual property securitization could find play in the U.S. mergers and acquisitions industry as it has in the U.K., according to people close to the developments.
There is at least one domestic whole company securitization in the works - described as a new twist on the Arby's logo securitization - which is reportedly an acquisition financing. Sources close to the transaction were scarce on details and asked that the parties involved not be named.
"I think we'll see more deals where the party acquiring the company will take assets that the acquired company has which are securitizable, and finance that to pay a portion of the acquisition," said one source who has worked on many of the domestic IP deals.
In the U.K., consolidation in the pub industry has spawned a wave of buyout motivated whole company securitizations, at least seven deals since 1998, according to Standard & Poor's. Several more deals are in the works.
In many of those transactions, the acquiring entity is an investment bank, particularly Nomura Securities, which has found it more lucrative to finance these acquisitions via a securitization, structuring the transaction and retaining the highly leveraged and highly yielding equity.
"They're putting a lot of debt on top of it because they can, therefore increasing their leverage and returns, more than if they just bought the business outright, through traditional financing," said an analyst at S&P.
U.S. deals eminent?
Even as whole company transactions are more difficult to structure in the debtor-friendly U.S., several bulge-bracket firms - including Morgan Stanley, Citibank and SG Cowen - are working to bridge M&A activity with IP and whole company securitization technology, sources said.
"They're all interested in this," one analyst said. "They can win business by potentially bridging the acquisition business, earning huge fees, warehousing [the assets] temporarily on balance sheet to justify the fees, and then exit the risk, and underwriting the bond offering. It's serious business."
"The only reason that I think it hasn't been utilized more frequently [in the U.S.], is that the M&A players are not familiar with securitization, and don't know how to identify assets in a target company that could be securitized," said Richard Rudder, an attorney at Willkie Farr & Gallagher, who has worked on several of the intellectual property deals domestically.
Because of the current bankruptcy laws in the U.S., whole company deals are more focused on true sale issues, rather than secured loan technology, which is the emphasis in the U.K.
For the acquirer, however, securitization could offer more attractive funding than more traditional methods of acquisition finance, such as bank loans, bond offerings or issuing equity.
To date, there been just one visible buyout driven by IP securitization, a $25 million deal that monetized the royalty stream associated with the Bill Blass label. In that transaction, which was structured and brought to market by CAK Universal Credit Corp., the company's management essentially bought out Bill Blass (who had chosen to step back from his business).
Sourcing the deals
According to Willkie Farr's Rudder, what has slowed the anticipated growth of IP securitization in general has been the lack of familiarity with the technology by investment bankers.
"It is the kind of thing that I think would have a lot of promise, if people know more about it and focused on the possibility a little bit more in an acquisition context," Rudder said. "Sometimes these things take time to develop and people need to get educated."
Assets such as medical patents, software patents, technology patents, and service provider brands are all assets that can be monetized via securitization, but have failed to be exploited.
"There's competition in manufacturing products out there, but ideas are protected and copyrighted," said an accountant at Deloitte & Touche who focuses on valuing licenses and royalty streams. "You've got to unleash the value of this by understanding the marketplace and commercializing intellectual property, and securitizing is one way to extract value out of your patents.
"Letting someone share with you something that you don't know already doesn't undermine your ability to be the most amazing investment banker out there," the accountant added. "This area is still in its early, early stages, but there's a huge upside to it."
