The basic idea of securitizing income streams is, of course, old hat. Everything from credit-card receivables to auto loans gets packaged into bonds these days. Issuance of asset-backed securities topped $875 billion last year, according to Thomson Financial, with home mortgages backing the majority. But securitizing assets as familiar (and clearly collateralized) as home mortgage loans is one thing; income from intellectual property is a bit of a leap.

That's what made the royalties from a familiar body of music — namely, David Bowie's — a good place to start.

According to David Pullman, founder and CEO of the Pullman Group, which structured the $55 million transaction for Bowie in 1998, the deal came about because the musician was searching for a way to borrow a lump sum to buy out a manager's minority rights to the royalties. Pullman structured a transaction where the music rights themselves would serve as collateral for the insurance companies that lent the money to Bowie. The success of that deal led Pullman to other, similar securitizations, including a $30 million Motown bond and another $30 million securitization for James Brown, the Godfather of Soul.

Those kinds of deals now look pretty straightforward. The music rights are placed in a special-purpose vehicle, which pays the interest fees on the bonds. The SPV is created to separate the revenue-generating assets from the rest of the artist's assets so that, in event of a bankruptcy filing by the artist or company that owns the rights, the bondholders will have guaranteed access to the assets. But the music model doesn't necessarily apply to other situations. "You need to look at each deal and see what the nuances are," says Winston Chang, an analyst in Standard & Poor's structured finance group. "There have not been enough situations to make generalizations."

In fact, there's not even an accurate count of the number of IP monetization deals, since most of them are confidential and sold to private investors. There are some decent estimates, though. Keith Bergelt, CEO of IP Innovations, a Charlotte, N.C.-based financial services firm, reckons there are about $1 billion of IP deals a year, on average. Bergelt offers another twist on the task of monetizing IP. His 2-year-old firm does valuations of IP in mostly middle-market companies that want to borrow more, or more cheaply. Using the intangibles as collateral, IPI then sells the companies credit enhancements.

Other financiers have taken on the complicated task of working with income streams derived from brands. For example, New York-based UCC Capital Corp. recently advised on a $53 million brand securitization for BCBG Max Azria, a fashion retailer and couturier. Bergelt's IPI provided a credit enhancement on that deal, which was completed in December. UCC has also done other fashion-industry IP securitizations, including a $25 million deal for Bill Blass and a $30 million securitization for Gloria Vanderbilt. "To securitize things like brand names," says UCC chief executive Bob D'Loren, "you need to understand the encumbrances." In the BCBG deal, D'Loren says, the issuer had to wrap its head around the complicated retail, wholesale and licensing revenue streams, quantify them and find a way to set up the securitization so that a failure in any of those streams did not undermine the brand name.

BCBG hired consulting firm Jassin-O'Rourke to act as a backup manager to ensure that the brand backing the bonds would be protected, regardless of what happens to the company. Andrew Jassin, co-founder of Jassin-O'Rourke, says that his firm gave an independent valuation of BCBG's brand, providing more comfort to the bond buyers. After the bond was sold to insurance companies, Jassin-O'Rourke was held as the backup manager who would step in to run the company or sell it if BCBG's management could not fulfill its obligation of running the business. "For a deal like that to work, you need to keep the brand value and the royalties running, regardless of what happens to the rest of the company," Jassin says.

If monetizing brands is tricky, finding value in patent portfolios is even trickier. D'Loren explains that because patents are so-called negative rights, they do not automatically come into force when they are filed. To be considered assets, users must agree to pay licensing fees for them, or they must be defended successfully in court. Bergelt of IP Innovations adds that patents are more volatile than copyrights or trademarks, because they are subject to obsolescence risk. Securitizing revenue from patents, he says, is a challenging activity. "That's why it's so uncommon."

There have been some patent deals done, however, most notably in the pharmaceutical world. In July 2003, Royalty Pharma Finance Trust, a special-purpose vehicle that holds the royalties from a portfolio of 13 biopharmaceutical products, issued a $225 million security backed by the portfolio. That deal avoided a key mistake made in an earlier landmark transaction that went awry. In 2000, royalties under a licensing agreement between Yale University, the licensor, and Bristol-Myers Squibb Co., the licensee, were employed to create the BioPharma Royalty Trust, which used the agreements as backing for an $80 million offering. That deal entered into early amortization in late 2002 because of lower-than-expected cash flow. The problem arose when Bristol-Myers moved unexpectedly to dump its entire portfolio of the drug using the IP (HIV drug Zerit) at a discount. The lesson, applied in the 2003 securitization: don't depend on revenues from a single drug.

Other patent monetization deals include a $50 million sale-license-back transaction between Motorola Inc. and GE Commercial Finance. In that deal, completed in June 2004, Motorola sold a portfolio of noncore patents to GE Commercial Finance for an up-front fee of $50 million, and an undisclosed percentage of royalties collected by GE over the coming years.