100 shares of Pavarotti?  
Stars turn to securitization

By KATHY BERGEN

CHICAGO - Nothing like a few superstars to turn the spotlight on a little-noticed trend - in this case, Wall Street's growing interest in turning all sorts of future cash flows into interest-bearing securities.

        In the last week, international bankers bandied about the notion of selling $50 million worth of bonds backed by future royalties of world-class tenor Luciano Pavarotti.  Earlier this year British rocker David Bowie became the first singer to pull off such a financing coup, raising $55 million against future sales of existing work.  And the Rolling Stones and Crosby, Stills and Nash reportedly have weighed following in his footsteps.

        The big names are focusing attention on an alternative form of financing, known as securitization.

        Essentially, securitization involves the bundling of receivables, or money owed, into large pools, then converting those pools into securities – either bonds or trust certificates – that pay a fixed or floating rate of interest.  Many times the securities are backed by extra collateral or some sort of insurance in case cash flows fall short.

        The basic appeal: Those who want to borrow money have direct access to capital markets, allowing them to bypass middlemen, such as banks.  As a result, borrowing costs are reduced.

        As well, investors generally get a yield that beats the rates paid by less-risky instruments such as U.S. Treasury securities.

        Home loans were the first to be bundled, back in the late 1970s, noted Leon Kendall, professor of finance and real estate at Northwestern University’s J.L. Kellogg Graduate School of Management.  “The reason it grew initially was because the savings and loan industry was moribund, and there was a vacuum to be filled.”

        Since then, “Creative minds have come up with creative ideas of what to securitize,” said George Howell, a Richmond, Va.-based attorney who specializes in the field.

        Everything from lottery winnings to proceeds from court settlements to disaster-insurance premiums have been securitized.

        David Pullman, the New York-based investment banker who masterminded the Bowie deal, is working on transactions that would securitize future cash flow from all manner of entertainment endeavors: royalties to writers and sports figures, and future receipts from music catalogs, TV syndication, film libraries and the like.

        This business has promise, he says, because the nature of the nation’s wealth is changing.

        “There is a tremendous shift in wealth from hard assets – steel and manufacturing – to intellectual property, entertainment,” said Pullman, managing director at Fahnestock & Co.

        At this point, however, the glitzier segments of the asset-backed securities industry are only a small piece of the rapidly growing market, which is heavily weighed toward home-equity loans, credit card receivable, auto loans, bank loans to businesses and home mortgages.

        In the first nine months of this year, $190.2 billion worth of asset-backed securities were issued in 521 deals worldwide, up 23 percent from a volume of $154.5 billion in the year-earlier period, according to Asset-Backed Alert, a weekly newsletter based in Hoboken, NJ.
 

SUN-SENTINEL December 6, 1997 - Page 16C