ROYALTIES 'R' US
Are intellectual bonds a smart money move?
By Ann Brown
So how'd you like to own a piece of Ashford & Simpson? Or, to be more specific, how'd you like to profit from their music royalties? In what could be the start of a new trend --- raising capital through selling "celebrity bonds" --- the songwriting team and R&B performers Nickolas Ashford and Valerie Simpson are the latest to raise quick cash by selling bonds backed by the future earnings of intellectual property, namely their music. Backed by future royalties from their 25-song catalog, the duo recently secured about $25 million in bonds. The catalog includes "Ain't No Mountain High Enough," "You're All I Need To Get By" and "Reach Out and Touch (Somebody's Hand)," songs they penned for Diana Ross and Marvin Gaye.
The couple is following a new trend in the securitization market. According to industry watchers, it's becoming fashionable to repackage assets with a predictable cash flow from which investors can hope to be repaid by future earnings. Such deals are a variation on using intangible intellectual property assets, such as trademarks, as collateral. Since the sales have a predictable cash flow and a measurable history, notes investment banker David Pullman, managing director of the New York-based Pullman Group, there's only moderate risk. Investors are repaid from song royalties. The royalties pay interest and principal to bond holders. These bonds have a 10-year average life and a 15-year maturity, are self-liquidating, have a fixed rate and are non-recourse. Artists keep 100% of the copyright.
Pullman broke ground in the securitization field in 1997 when he created a deal for rocker David Bowie that helped the singer raise $55 million in securities backed by bonds based on future earnings. However, unlike the Ashford & Simpson bonds, Bowie's bonds offered a 7.9% return and carried a partial guarantee by his record company, EMI.
The Ashford & Simpson bond sale included senior notes rated A by two national agencies, plus a small tranche of lower-rated investment-grade securities. Pullman won't disclose the exact amount of the sale, only that it was eight figures. The Pullman Group bought the deal as principal and later resold the bonds to a group of domestic insurance companies. Ashford, 55, and Simpson, 50, who sold their first batch of songs for just $75, have launched a record company, Hopsack & Silk, and own a Manhattan Afro-Caribbean restaurant, Sugar Bar.
Other songwriters have opted for this strategy. The Motown songwriting team of Edward Holland, Lamont Dozier and Brian Holland became principals of the second music-royalty bond issued. In August 1998, they raised $30 million selling bonds against their 300-song catalog. Holland, Dozier and Holland penned "Baby Love," "Please Mr. Postman" and "Where Did Our Love Go?" for artists such as the Supremes, Marvin Gaye and the Temptations. Their catalog has had steady earnings since the 1960s.
According to Pullman, this capital-raising concept can be applied to other intellectual property, including books, films and computer software. But is it a wise investment option for most? While the trend is going, some consider intellectual bond risky because royalties earned from publishing and record sales, performances, and radio and/or video airplay can fluctuate. Investment representative Donald Samuel of the Culver City, California, branch of the brokerage firm Edward Jones finds intellectual bonds "very speculative. It's a new territory, with lots of unanswered questions. What happens if someone defaults? Who owns the materials?" While such investments may be suitable for institutional investors, for the moment they're unproven for individual investors, says Samuel. "It's good for people in the higher echelons of their industry. But unless you're Aretha Franklin, Steven Spielberg or John Grisham, [intellectual] bonds aren't necessarily the best option."
BLACK ENTERPRISE, June 1999, p. 39
