Bowie Bonds:
One-Off Or
A Sound Vision For The Future
By Matthew Benz
David Pullman and his deals had been darlings of the media for nearly two years by early 1999, when Pullman first met with Brian Williams, director of music private banking at Nashville's SunTrust Bank. "It was the thing of the moment a couple of years ago," Williams says of artist-royalty securitization. "Everybody was talking about it."
Pullman had helped assemble for David Bowie the first-ever securitization of a music artist's royalties. The sale of those Bowie Bonds in 1997 gave Bowie $55 million upfront; in exchange, the buyer of the bonds had the right to receive the future revenue generated by Bowie's catalog until the principal plus 8% interest was repaid. An irresistible mix of rock 'n roll and Wall Street, the deal generated lots of headlines, as well as speculation that a flood of deals involving other artists would soon follow.
Williams says he and Pullman discussed the possibility of working together to develop securitisation deals in Nashville, but no common ground was reached and the two amicably parted.
Working via the Pullman Group, his wholly owned boutique investment firm, Pullman has gone on to put together similar deals for Ashford & Simpson, James Brown, the Isley Brothers, songwriting team Holland/Dozier/Holland, and the estate of Marvin Gaye.
For creating the bonds and finding buyers for them, Pullman picks up a fee of about 10% of the deals' values. So-called institutional investors --- such as pension funds and insurance companies --- buy the bonds, which provide a steady 8%-10% annual return and lend some diversity to their multibillion investment portfolios.
Yet even with big names like Bowie in Pullman's portfolio, it is clear by now that the business of selling bonds backed by artist royalties has failed to live up to its hype. Today, Pullman himself is looking to apply securitization elsewhere within the expanding world of intellectual property (IP).
Still, Williams believes he may be able to securitize assets within Nashville's large music-publishing and songwriting community. He also says SunTrust may have the financial technology to put together deals for artists below the superstar status of Bowie, Brown and Gaye.
"Nashville is known as a publisher's town," says Williams from his office on Music Row. "You have a lot of individual and small-company ownership of intellectual property, which I don't think is quite as common in some of the other recording centers. We're seeing a real market there."
Williams say that the SunTrust securitization product, which had been under consideration even before his meeting with Pullman, could be rolled out within three months.
Meanwhile, in New York, investment bank Credit Suiise First Boston (CSFB) has hired Rob Horowitz to spearhead a push into IP securitization. Horowitz, who structured what is generally regarded as the largest music-asset securitization to date --- Chrysalis' 80-million-pound ($87.3 million) deal involving future catalog revenue --- says that Credit Suisse is "definitely chasing music" as well as other IP assets.
Whether there truly is potential here and whether that potential can be realized will not be known for several years. And in light of the failure of artist-royalty deals to live up to their billing, no one involved in music finance seems willing to speculate as to the potential size of these markets.
"I really think there was a whole lot more talk than there was action," Williams says of the first few years following the Bowie deal. "The fact remains that very few of these deals have been done."
So while on one has officially declared the latest round of activity the next big step in the evolution of music-asset securitization, there's still "a buzz in the air," says Michael Elkin, chair of the entertainment practice group at the New York law firm Thelen Reid & Priest. "Where recording artists got psyched up about the possibility of accumulating a lot of money today so that they could cash in on their future assets," he says, "securitization today is being used as it was in a more traditional manner --- which is an ability to obtain financing at very, very attractive rates."
Some had predicted that the music-royalty deals would constitute a $400 million market on an annual basis. But according to Jay Eisbruck, an analyst who has rated artist deals for New York-based bond-rating agency Moody's Investors Service, all the deals done so far, including the first Bowie bonds, total only $250 million.
What happened? Many say that expectations, fueled in part by the prognostications of Pullman and others, were simply unrealistic --- and that the pool of available artists for Bowie-bond-like deals is too small.
"Frankly, the artist deals that we've seen, there's usually a specific purpose --- like Bowie, trying to take advantage of a tax situation, or an artist that has a problem," says Robert D'Loren, president of CAK/Universal Credit Corp., a specialized finance company chaired by Charles Koppelman, former North American head of EMI Records Group. For artists in "good standing," says D'Loren, "if they need an advance, they're going to get it from the record label, at no interest rate."
Stephen Swid, chairman of performing-right group SESAC, which in 1999 obtained $29 million in financing through a securitization arranged by CAK, agrees, "Bob Dylan, the Gershwins -- they don't need the money. For those catalogs that are earning lots of money --- and I told this to Bob D'Loren early on --- you're not going to get those catalogs. The catalogs that you want to finance are not going to be interested."
Securitization remains something of a quiet financial giant, even though it underlies the U.S. home mortgage market and the $900-billion asset-backed bond market, where credit card and auto finance companies go to get a large portion of their funding.
The core idea is simple: monthly credit card payments, auto loan payments, or almost any other predictable revenue stream can be packaged into securities called asset-backed securities (ABS). The seller of the bonds receives money upfront that can be put to work immediately. Investors, over a specified number of years, recoup their principal investment, plus interest to compensate for the risk that the underlying payments will not be made.
But ABS deals are intricate --- and therefore time-consuming and expensive to put together --- requiring even the creation of separate, "bankruptcy-remote" companies into which the revenue streams are diverted before being passed on to investors.
The original Bowie bonds, which carry an interest rate of about 8 and a quality A rating from Moody's, were the first to be backed by IP assets of any sort --- in this case, revenue from the sale of Bowie's 25-album catalog.
Using phrases he involves regularly, Pullman says of the Bowie deal, "At first, they thought I was crazy. Then, three months later, they thought it was a good idea. Then ,six months' later, it was everybody else's idea."
Yet there remains sharp disagreement over whose idea that first artist-royalty securitization actually was. Pullman has filed a $3.5 billion lawsuit alleging that the Rascott/Zysbat Organization (RZO), David Bowie's business managers, stole his idea for the deal and went on to use it with other partners, including CAK/Universal Credit Corp.
Pullman says, "We had to protect our rights the way we would protect any of our artists' rights."
William Zysblat, managing director and founder of RZO, notes that Pullman, at the time an employee of the brokerage firm Fahnestock, was involved in the project, but he says that he's "delusional" if he "believe he invented this idea." Zysblat says he and other of his business associates were the first to realize that securitization could be applied to artist-royalty assets.
But Zysblat also makes clear that he has no desire to compete with Pullman, because he does not believe that the market Pullman wants to claim for himself constitutes a viable business. The Bowie deal, Zysblat says, arose out of a unique set of circumstances, including the imminent reversion of Bowie's catalog to the artist, and a desire to take advantage of a special tax situation, which he declined to discuss. He adds, "I guess everybody but me thought it was going to be an amazing business opportunity."
CAK's D'Loren likewise cedes whatever market may remain for Bowie-like deals to Pullman. "We're really a corporate finance company." Through a specialized form of financing known as whole-company securitization, D'Loren and CAK have helped the likes of Bill Blass and Gloria Vanderbilt raise money. He says his firm is within striking distance of $300 million worth of deals this year.
In Nashville, SunTrust has been extending loads to artists for about 26 years in which their intellectual property --- in this case, their songs --- serves as the collateral. Williams says that's a "garden variety" product for his bank as well as for others in town.
Now, Williams wants to marry the bank's familiarity with the Nashville music scene to the established securitization practice of its Equitable Securities arm. "It's something that we're investigating," Williams explains, "because we fell we're in a real logical position to do so."
In-house expertise and pre-existing securitization infrastructure are key, because the cost of putting together, or structuring, a securitization can run as high as 30% of the ultimate size of the deal. To justify the deal's cost, and to make it large enough to be of interest to investor, most deals have been at least $25 million in size.
"We think we can get the number down significantly, maybe as low as $10 million," Williams says. "There may also be some opportunity to bundle some of these together as a group vs. a single, in which case you could have the opportunity for a smaller securitization. But, in general, you are looking at $10 million or more now, whereas we're doing loans against intellectual property for probably $100,000 and up. In some cases, securitization is probably not even an option for the smaller borrower."
CFSB's Horowitz is well aware of what it takes to pull off a music-asset securitization. An in investment banker in the Royal Bank of Scotland's financial markets unit in London, he spent the past two years putting together the Chrysalis transaction. Chrysalis is using the funds from the sale of the bonds --- on which it is paying a lower interest rate than it would with a bank loan --- to help restructure its corporate finances.
CSFB has long been one of the top banks for the securitization of traditional assets, such as credit cards and auto loans. The IP focus represents a new endeavor for the bank, which will also seek to leverage CSFB's presence and contacts in media investment banking.
D'Loren takes a big-picture view of the increasing awareness, on Wall Street and elsewhere, of the importance of IP assets. "Forty years ago, 90% of corporate net worth was tied up in tangible assets," he says. "Today, it's reversed. So if 90% of the world's corporate wealth is tied up in intangible property, what does that tell you about the future of intellectual property and intangible finance? Either figure it out, or you're going to have a shrinking business if you're an asset-based lender."
Securitization's use in the music business only goes back five years. Like any new market, it remains a volatile mix of possiblity and potential disappointment. Among the major remaining barriers is the inability of investors to get comfortable with the way record lables do business --- investing in a hundred artists in the hopes that one or two pay off. Williams says, "There's not an understanding in the investment community of the music business at really any level."
"When I speak to people on Wall Street, they're kind of like, 'That's your'," Pullman says of the music-royalty securitization market that he has thus far dominated.
Horowitz says CSFB is "actively pursuing" several IP deals, including some involving music assets, but he declines to elaborate for now. After the unfulfilled, and unrealistic, promise of artist-royalty deals, a little discretion may be on order.
BILLBOARD, June 20, 2001