The loss of David Bowie at the start of this year prompted much discussion of his musical legacy, but less well-publicised was his contribution to finance.
In 1997, rather than renew a long-term record label contract, LA banker David Pullman convinced Bowie to securitise the rights to receivables from his back catalogue into what quickly became known as “Bowie Bonds”. Paying 7.9% over ten years (compared to 6.4% from comparable US treasury bonds at the time) the US$55 million issue allowed Bowie to buy out an old manager who retained a large stake in his songs. Fans who hoped to own a piece of Ziggy Stardust were disappointed, however, as the entire issue was sold to Prudential Insurance.
Bowie’s move, as so often, was prescient. Whereas mortgages had been packaged into financial instruments since the 1970s, the Thin White Duke was the first musician to use future royalties to underpin a bond. Other big names including James Brown, Marvin Gaye and even Iron Maiden soon followed suit, forming par t of a new wave of securitisations in the early-to-mid 2000s backed by ever-more innovative income streams.
Another such front-runner in this burst of IP securitisation was the film industry. Studios have always sought to reduce their exposure to the volatility of box office performance, and securitisation provided a means of shifting some of that risk onto the credit market, with studios issuing an aggregate par of more than US$14 billion in film-backed bonds between 2005 and 2010. The bonds were funded by rights to a portion of the revenues from a slate of upcoming films, often supported by a library of older movies whose long-term income from channels such as pay-per-view and merchandising were more established.
Film bonds, however, demonstrate an issue common to a number of forms of IP securitisation, including music royalties, in that as an operating or future flow asset (as opposed to a financial asset such as an auto loan) they are especially dependent on the ongoing input of the collateralising IP’s creator. Whereas Ford, having provided the initial finance, has little direct control over whether borrowers ultimately pay for their Fiestas, a major studio often controls almost every element that determines a film’s financial success – from pre-production budgeting right through to free television distribution some five or more years later.
This degree of control allowed for a gradual divergence of interests between investors and studios, which eventually caused film bonds to lose popularity. Paramount’s
US$300 million 2004 bond was the first to be issued unwrapped with a Moody’s rating of less than Aaa
(Baa2 in this case), and as the popularity of such products increased, further risk was transferred to investors whose acceptance of such was due in no small part to the perceived glamour of the industry. The reimbursement of often uncapped studio costs – especially the notoriously expensive and malleable “P&M” (Prints and Marketing) – moved above bondholders in the payment waterfall. Doubts also arose over revolving structures which committed investors to buying those of a studio’s films which met given criteria such as budget or age rating, with a perception that filmmakers were tailoring the most attractive blockbusters to fall outside those profiles whilst plucking turkeys to fit. This problem was exacerbated because whilst most other securitisations might include performance triggers that terminate further funding of assets when early purchases underperform, reverting to a rapid payment waterfall, with film this made mezzanine and equity debt too difficult to sell. The result was that when, following a film’s underperformance, senior debt holders wanted to stop funding new movies and take advantage of the protection of mezzanine and equity debt, those junior investors would instead push to acquire as many new rights as possible in the hope of financing a success. The most recent securitisations, such as last year’s US$250 million issue by Miramax (the company behind hits such as Pulp Fiction and Shakespeare in Love) have tended to try to avoid these issues by focusing on film libraries rather than upcoming slates.
Similar problems of misaligned interests are evident with Bowie, who issued his bonds whilst simultaneously predicting the death-by-Internet of the copyright systems that underpinned them. “Music,” he told the New York Times, “is going to become like running water or electricity”. Two years later, 1999 saw the music industry’s global revenues peak at US $39.7 billion. That summer, Sean Parker and Shaun Fanning launched Napster. By 2004 piracy and a shift in consumer tastes from HMV albums to iTunes singles prompted Moody’s to downgrade the bonds from A3 to Baa3. By contrast Bowie had already, in his words, turned to face these strange changes and was using some of the proceeds of his issue to invest in an Internet service provider and online banking platform, whilst focusing his musical efforts on the remaining reliable revenue stream – live performance (the receipts of which were not included in the bond).
Few music royalty-backed securitisations have followed the initial flurry after Bowie Bonds, partly because of the issues already covered, but also because few musicians have the back catalogue to sustain repayments. Those that do – the Beatles, for example – rarely enjoy straightforward ownership of the rights involved. More success has been found in financing the receivables of the rights of the songwriter (the other major right besides the musician’s in a piece of music), as these are more often owned directly. However, ownership issues have impeded attempts to securitise IP receivables from a variety of popular sources, for example sports stars whose image is often tied to a range of sponsorship deals. Added to this more recently is a tighter regulatory environment, with some even seeing Bowie Bonds as emblematic of the appetite for ever-more exotic structures that eventually fed into the financial crisis. Evan Davis, the BBC’s economics editor and presenter of Newsnight, has even suggested (tongue only partly in cheek) that David Bowie caused the Credit Crunch.
Despite these setbacks, some financiers continue to look for ways to adapt such securitisations for the next credit cycle. A San Franciscan company has demonstrated that tradable sports star-backed securities can work on a small scale, whilst securitisation has even been mooted as a solution to student debt, where students would sell rights to their future earnings in return for upfront payments to cover their education. As a means of diversification, where performance is not directly linked to the financial markets, variations on Bowie’s idea continue to capture investor interest.