Strike Up the Bond 

A cavalcade of aging rockers follows Bowie into the securities business 

By JAY SHERMAN and MARC POLLACK  

         Just what the boring old bond market needs – some sex appeal from David Bowie and Motown.  
         Bonds, the IOUs that finance everything from city buildings to corporate R&D, are now attached to something far glitzier: top-selling music artists.  
         Bowie started the trend last year with a $55 million deal offering investors a piece of his lucrative royalties.  Two weeks ago, Motown songwriters Brian Holland, Lamont Dozier and Edward Holland followed suit with their own $30 million offering.
         And last weekend Rod Stewart received a $15.4 million securitized loan from Nomura Capital backed by revenues from his catalog.
         Crosby, Stills & Nash, the Rolling Stones, Elton John and other platinum-selling acts are now weighing similar deals, according to industry sources.
         Two factors are driving the trend.  Aging rockers are eager to leverage their steady source of income – recording and songwriting royalties – to create diversified investment portfolios for their golden years.  Selling securities beats waiting for that monthly royalty check, because it allows the artist to cash out and invest money elsewhere.
         At the same time, investment-banking boutiques are looking for innovative tools that can steal business away from the powerhouse Wall Street firms.
         “We now have a ton of these deals in the works,” said David Pullman, a managing director at investment bank Fahnestock & Co., who put together the Bowie and Holland-Dozier-Holland deals.
         “We doing this with bands the size of the Stones and that type, but they don’t have to be that big,” he added.
         Here’s how it works.  Investment bankers package years’ worth of cash flows – in this case, expected earnings from royalties – into debt securities that are pitched to private investors.  The proceeds from the sales (minus the bankers’ fee) go to the artist; the investors are repaid as the royalties roll in.
          Joseph Rascoff, co-chairman of the RZO Cos., the talent management company that helped engineer the Bowie deal, said royalty securitizations could help artists who want to tap their royalties early and diversify their portfolio.
         “Now, [the artist] can securitize all or part of a catalog and take that money to buy another catalog and securitize that,” Rascoff said.  “In five years, he has substantially diversified his portfolio, and, instead of putting all of his eggs in one basket, [he] can expand the baskets without having to put out any money” to do it.
         Bowie declined to comment, according to his publicist.  In fact, a major attraction for entertainers is that details of the bond offerings are kept private, thus sparing their personal finances scrutiny from the media.
         But deals are not for everyone.  Investors accustomed to buying stock in public companies may not like entertainers’ distaste for full disclosure.
         Moreover, the acts involved must have very large catalogs that generate steady sales.  Investment bankers say such catalogs should be valued at more than $10 million to attract sufficient investor interest.  The Motown writer, for instance, securitized a veritable 300 song jukebox, including such hits as “Baby I Need Your Lovin’,” “Baby Love” and “Heat Wave.”
         Nor should affluent Boomers itching for keepsakes from their musical youth expect to buy a piece of Bowie.  Experts say these bonds are meant mainly for large institutional investors.
         As Andrea Kutscher, a portfolio manager at Prudential Insurance, which bought the Bowie securities, put it: “This is still a market suitable for a select few large investors like ourselves.”
         Yet more deals are on the way.  Prominent industry veterans Charles Koppelman, former head of EMI Music, and Irving Azoff, chief of Revolution Records and manager of the Eagles, are working with companies looking to make similar deals.
         “After studying the market, we see tremendous potential for recording, publishing and TV copyrights and licensing fees,” said Kutscher.  Prudential was so taken with the idea, in fact, that it teamed with RZO to form Entertainment Finance International LLC., a one-stop shop that will package securities and sell them back to Prudential.
         A popular tool in the credit-card and mortgage industries, securitization has slowly been making its way to Hollywood, first as a tool of studios looking to offset movie production costs, and then in a way to realize – and in some cases increase the value of the film libraries.
         In Wall Street jargon, the process is called off-balance sheet financing, because the income-generating asset is sold to a financing entity that does the actual deal and is thus taken off the issuer’s books – an important feature for a company looking to lighten its balance sheet, as well as generate cash.
         Past issuers have included Universal, 20th Century Fox and Dreamworks SKG, and experts say future issuers could include Polygram NV, Jerry Seinfeld and others.
         But the deals may work out best for individuals such as Bowie, which insiders say is exactly the point.
         “I am here to empower the artist and the creator,” Pullman said.  “Take Bowie for instance.  He hit a home run.  He was able to buy out his manager, retain his catalog, and [he] got non-taxable monies upfront.  He’s very happy.”